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When an employee is auto-enrolled into a workplace pension, they are placed — by default — into whatever fund the employer or pension provider has designated as the default option. For the vast majority of workers, this is where their pension savings sit for the entire accumulation phase: in the default, unchanged, unreviewed.
This is not necessarily wrong. Default funds are carefully constructed to be broadly appropriate for a working population. But "broadly appropriate for a working population" is not the same as "optimal for you."
This guide explains how workplace pension investment typically works, the mechanics of the default fund, why the standard "lifestyling" approach may actively harm drawdown investors, and what you should do depending on your distance from retirement.
How Workplace Pensions Are Structured
A defined contribution (DC) workplace pension — which is what auto-enrolment creates — gives members access to a menu of investment funds. Contributions from both the employer and employee are invested in these funds and grow (or fall) according to market performance.
The fund menu varies by provider and employer arrangement but typically includes some combination of:
- The default fund (often a lifestyle or target-date fund)
- Multi-asset funds at different risk levels (usually labelled "Cautious," "Balanced," "Growth," or similar)
- Single-asset class funds (UK equities, global equities, bonds, property, cash)
- ESG (Environmental, Social, Governance) funds (increasingly common)
- Self-select or open-architecture options (available in some larger employer schemes; allows access to a wider fund range)
The employer and trustee body select the fund menu. Members choose which funds to use from the menu offered. If no choice is made, the default fund receives all contributions.
The Default Fund: What It Is
A default fund is the fund into which members are automatically placed if they do not make an active investment choice. Auto-enrolment regulations require every qualifying workplace pension scheme to have a default fund that meets specific criteria:
- It must have a documented investment objective that is appropriate for a broad member population
- It must be reviewed by the trustees regularly
- The annual management charge must not exceed 0.75% (the default fund charge cap for auto-enrolment schemes)
Most modern default funds are lifestyle or target-date funds. These funds follow a lifecycle strategy: starting heavily invested in equities (for growth) in the early years, and gradually shifting towards bonds and cash as the member approaches their designated retirement age.
The logic is straightforward: equities are volatile but grow over the long term; bonds and cash are more stable but offer lower returns; as retirement approaches, stability becomes more important than growth.
Why this is appropriate for many, but not all:
The lifestyle strategy was designed for an era when most workers approaching retirement were buying annuities — converting their pension pot into a guaranteed income. Annuity pricing is sensitive to interest rates and bond yields. Moving the pension fund into bonds as retirement approaches hedges against the risk that bond yields fall (reducing annuity rates) just before retirement.
But the pension freedoms of 2015 changed the landscape fundamentally. Millions of retirees now draw down their pension in flexible drawdown rather than buying an annuity. For a drawdown investor, a 25-30 year retirement begins at 57-65 and continues to 85-95. The investment horizon is not "retirement date" — it is the rest of the member's life.
A lifestyle fund that shifts heavily into bonds and cash by age 65 is poorly suited to a drawdown investor who needs equity growth for 20-30 years of retirement.
The Lifestyling Problem in Practice
Consider a 58-year-old in a lifestyle fund targeting retirement at 65. The fund began automatically shifting towards bonds and cash at age 55 — the typical de-risking start point. By the time the member reaches 65, the fund may be invested as follows (illustrative, varies by provider):
- Equities: 20-30%
- Bonds: 40-50%
- Cash/money market: 20-30%
If this individual then enters flexi-access drawdown at 65 with a 25-year investment horizon (to age 90), the fund's heavy bond/cash allocation provides far too little growth potential. Over 25 years at a 2% net real return (bonds), the fund may grow modestly. Over 25 years at a 5-6% net real return (equities), the same fund more than doubles.
The difference between a bond-heavy and equity-heavy drawdown portfolio over 25 years, starting at £300,000, can be £200,000-£400,000 or more.
What to do:
If you are in a lifestyle fund and planning to draw down (not buy an annuity), you should:
- Review the current asset allocation of your pension (the annual statement shows this)
- If the fund is already de-risking (shifting to bonds) and you are planning drawdown, consider switching to a non-lifestyle fund (a global equity tracker or a balanced growth fund)
- Transfer to a SIPP before retirement if the workplace scheme does not offer appropriate drawdown-oriented investment options
What to Do Depending on Your Time Horizon
More than 15 years from retirement
At this stage, equity growth is the priority. Volatility in the short term is irrelevant — markets have historically recovered from all major setbacks within 7-12 years.
Recommended approach:
- Check whether the default fund is appropriate — if it has begun de-risking (as some do for younger members with lower target retirement ages), it may not be
- If a self-select global equity index fund is available, this is typically the highest-growth option at the lowest cost
- Compare the charges: the default lifestyle fund may charge 0.5-0.75%; a self-select global equity tracker may charge 0.1-0.2%. The difference compounds significantly over 15+ years
A 0.5% annual charge reduction on a £100,000 pot over 20 years at 7% gross growth saves approximately £48,000 in charges — a genuinely material number.
5-15 years from retirement
At this stage, the investment strategy depends on what you intend to do at retirement:
If buying an annuity: Moving towards bonds (to hedge annuity rate risk) has logic. The lifestyle/target-date fund's default approach is broadly appropriate.
If drawing down: Remain in equities. The 5-15 years before retirement is still a long investment horizon when combined with a 20-30 year drawdown period. Switching to bonds now reduces long-term returns for no proportionate benefit.
Practical check: Review the default fund's de-risking schedule. If it begins de-risking at 10-15 years from the target date, actively override it and stay in the equity component of the fund range — or transfer to a SIPP where you control the investment strategy.
Within 5 years of retirement
If buying an annuity: Transition towards bonds and cash makes sense — you want to lock in the current annuity pricing and reduce the risk of a market fall immediately before purchase. A 30-40% move towards bonds/gilts over the final 2-3 years is reasonable.
If drawing down: This is the "sequence of returns risk" period. A significant market fall just before or just after starting drawdown is the biggest risk to a drawdown investor. Some de-risking is appropriate — but not to the extent that the lifestyling default assumes. A 60-70% equity, 30-40% bond allocation in the final years before drawdown provides a reasonable balance.
Practical action: Consider whether the workplace pension scheme gives you sufficient flexibility. Many larger schemes only offer a limited fund range. A SIPP allows full investment flexibility, including international diversification, REITs, infrastructure funds, and passive trackers across all asset classes. The transition from a workplace pension to a SIPP at or before retirement is one of the most common and most beneficial moves for those approaching retirement with significant pension savings.
ESG and Responsible Investment Options
Most modern workplace pension schemes now include at least one ESG (Environmental, Social, Governance) fund. These funds exclude or underweight companies in sectors such as fossil fuels, tobacco, weapons manufacturing, and gambling, and instead weight towards companies with better ESG characteristics.
The investment performance of ESG funds relative to mainstream funds has been broadly comparable over the medium term (2015-2025), though there was a period in 2022 when ESG equity funds underperformed as energy stocks (commonly excluded from ESG portfolios) surged.
ESG funds in workplace pensions typically charge slightly more than plain vanilla trackers but less than actively managed funds. They are an appropriate option for members who wish to align their pension investment with their values, provided the charges are acceptable.
The Transition to a SIPP at Retirement
For members with significant pension savings (£50,000+), transferring the accumulated workplace pension to a SIPP at or before retirement is often the optimal strategy.
Why:
- The SIPP offers full investment flexibility (the workplace scheme fund range is typically limited)
- Drawdown mechanics are better in a SIPP — most SIPPs offer a full flexi-access drawdown facility with flexible income amounts and timing
- The annual management charge for the entire portfolio is typically lower in a competitive SIPP than in a workplace scheme (particularly for large pots)
- Consolidation of multiple workplace pension pots into one SIPP provides simplicity and a single death benefit nomination
The transfer process:
- Contact the chosen SIPP provider and initiate a transfer
- The workplace scheme transfers the fund (typically as cash, though in-specie is sometimes possible) to the SIPP
- Most transfers complete in 2-6 weeks
- Check for GARs, protected tax-free cash, or other safeguarded benefits before transferring — if any exist, take advice before proceeding
Platform Options for a SIPP at Retirement
For members transitioning from a workplace pension to a SIPP at retirement, the platform choice matters:
- Hargreaves Lansdown: 0.45% on funds (capped at £45/year for individual shares). Excellent fund and share range. Easy to use. Higher-cost for large fund-heavy portfolios.
- AJ Bell: 0.25% tiered. Good range. Mid-market in terms of cost.
- Interactive Investor: Flat fee (approximately £60-90/month). Best value for large pots above £250,000-£300,000.
- Vanguard UK: 0.15% (capped at £375/year). Passive funds only. Excellent for straightforward passive portfolios.
The choice depends on the pot size, investment style (active vs passive), and the breadth of investment options required.
FCA Compliance Caveat
The value of pension investments can fall as well as rise. Past performance of any fund or asset class is not a reliable guide to future returns. Tax rules, auto-enrolment regulations, and pension legislation change. The charge cap and specific fund menu details vary between employers and pension providers. This guide reflects the position as at 2026 and is for general information only. It does not constitute regulated financial advice. Before switching investment funds, transferring a pension, or making significant changes to your retirement investment strategy, seek advice from an FCA-regulated financial adviser.
How Global Investments Can Help
Global Investments advises high-net-worth individuals and UK expats on pension investment strategy, SIPP selection, and the transition from workplace pension accumulation to retirement income. Whether you are reviewing your investment choices in a current workplace scheme, planning the move to a SIPP, or building a drawdown portfolio, our team can provide the expert, regulated guidance needed.
Contact us to arrange a pension investment review.
This guide is for general information only and does not constitute financial, legal or tax advice. Pension rules, tax rates and programme details change; verify current requirements with a qualified and FCA-regulated pensions adviser before acting. Pension transfers involving defined benefits over £30,000 require regulated advice.
