Default funds in workplace schemes

When you join a workplace pension, your employer chooses a pension provider to invest your contributions, and the money typically goes into what is called the default investment option¹. You do not have to do anything for that to happen. A default fund is the investment option you are automatically allocated when you join a workplace pension scheme, and around 90% of pensions are saved in default funds³.

The default is not a single investment. It is a ready-made arrangement that a provider runs on behalf of everyone who does not pick their own funds, and every scheme used for automatic enrolment must have a default investment arrangement⁵. Providers have to offer a fund that meets the needs of most people, and that is where your money will be automatically invested unless you say otherwise⁶.

What you end up with depends on two things: how much goes in, and how the investments perform. The minimum contribution is 8% of qualifying earnings, typically split 4% from you, 3% from your employer and 1% from the government as tax relief⁷. The value of the pot can increase or decrease depending on factors including investment returns and the contributions made⁸.

How money in a workplace pension gets invested

A workplace pension is one of two types: defined benefit and defined contribution schemes⁶. In a defined contribution scheme, your employer chooses a pension provider to invest your pension contributions, and a percentage of your pay is put into the pension scheme automatically every payday¹. The pot is based on what you or your employer paid in, plus whatever the investments have earned or lost¹⁴.

The default fund is chosen by your employer, or in certain circumstances a group of trustees¹⁵. It is not a savings account: the money is invested, usually in a mix of assets, and the provider sets the investment approach. Some schemes run lifestyle or target-date arrangements, where the investments shift as you approach retirement, and your target retirement age affects how the money is invested¹⁶.

If you never make a choice, you stay in the default. Royal London, for example, says that if you are in a workplace pension and do not want to make an investment choice, it will automatically invest your money into a default option¹⁷. Aegon's TargetPlan works the same way: if you do not choose where to invest, you are automatically invested in your scheme's default fund¹⁸. The same applies across the market, because the rules require a default to exist.

What you pay in: at least 8% of qualifying earnings

Minimum contributions to a workplace pension are set at 8% of your qualifying earnings, with your employer contributing at least 3% of those earnings¹⁹. The remaining part comes from you, and the government adds tax relief, so the typical split is 4% from you, 3% from your employer and 1% from tax relief⁷. Age UK puts the minimum contribution at 8%²⁰, and Which? reports the same figure²¹.

Qualifying earnings are the slice of pay used for the calculation, and the 8% applies to that slice rather than to everything you earn. The employer contribution is the part that makes a workplace pension different from saving on your own: it is money added on top of your pay because you are in the scheme.

There is a threshold below which the employer duty does not bite. If you earn £6,240 or less a year, your employer does not have to contribute, but can choose to do so¹². Earn more than £6,240, even by a penny, and your employer has to contribute while you are in a workplace pension²². If you earn less than £6,240 and ask to join, the employer still does not have to contribute, but can choose to²³.

Eligibility for automatic enrolment is separate from the contribution rules. If you are aged between 16 and 21 and earn more than £10,000 a year, your employer will not automatically enrol you, but you have the right to join if you want, with both of you contributing and tax relief added²².

Your pot's value depends on contributions and investment performance

In a defined contribution scheme, the value of your pot at retirement depends on how much you and your employer have contributed, and how well the underlying investments have performed²⁴. The value of the pension pot can increase or decrease depending on factors including investment returns and contributions made⁸. Aegon states the risk plainly: the value of an investment can fall as well as rise and is not guaranteed, and the final value of your pension pot may be less than has been paid in²⁵.

That is the central difference from a defined benefit or final salary pension, where the promise is usually based on your salary and length of service rather than on investment returns. In a defined contribution scheme the investment risk sits with you, not with your employer.

How much you end up with varies widely with contribution levels. Which? modelling shows a total pot value by the age of 68 of £236,000 where contributions are 6% from the employee and 3% from the employer, and £289,000 where they are 8% from the employee and 3% from the employer²⁶. Those are illustrations from one set of assumptions, not a forecast, and the actual figure will depend on investment performance and charges over the whole period.

Charges matter because they are deducted from the pot. Default workplace pension funds used for automatic enrolment are capped at 0.75% a year⁹. That cap applies to the default arrangement, which is one reason staying in the default can be a lower-cost starting point than some alternatives.

Staying in the default fund or making your own choices

You have a choice, and doing nothing is one of the options. If you select another fund, future contributions received will be invested in that fund, and you can also choose to switch the existing fund value to the new fund or keep it in the default²⁵. With NFU Mutual's Select Pension Plan, for example, you remain invested in the default fund until you decide to take your pension benefits or choose to switch to alternative funds²⁷.

The trade-off is between simplicity and control. The default is designed to suit most people, is capped on charges, and requires no decisions. Choosing your own funds means deciding how much risk to take and reviewing that decision over time, and it may mean higher or lower charges depending on the funds and the scheme.

If you are considering moving out of the default, the practical questions are what the alternative funds invest in, what they cost, and whether the scheme's default already does something similar. Your scheme's documents will set out the funds available and their charges.

Moving your pot: transfers and what you could lose

A transfer moves your pension from one scheme or provider to another. It can make sense for tidiness, but it can also cost you things you cannot get back. You may have to make payments to the new scheme, pay a fee to make the transfer, lose any right you had to take your pension at a certain age, lose any fixed or enhanced protection, or lose any right you had to take a tax free lump sum of more than 25 per cent of your pension pot²⁸.

Guarantees are the most common casualty. Defined benefits, such as guaranteed annuity rates or protected tax-free cash, can be lost when you move your pension pots⁹. Legal & General tells its own workplace members that if they transfer their full pension out, they may lose any protected tax-free cash they have, and that a partial transfer means losing entitlement on the amount transferred out²⁹.

Some transfers are not possible at all. You might not be able to transfer your pension if you have a share of an ex-partner's pension following a divorce, or a scheme with special features or guarantees like a Guaranteed Minimum Pension³⁰. You also cannot transfer out of a scheme that has been taken over by the Pension Protection Fund³¹.

Complaints about transfers often centre on the same themes: an adviser may not have disclosed higher charges, loss of guarantees such as guaranteed annuity rates, or market value adjustments on with-profits funds, along with unsuitable risk checks or investments and loss of workplace pension benefits³². If a transfer goes wrong, the Financial Ombudsman Service can look at complaints about transfers from personal pension arrangements³².

What protects you, and where protection stops

Protection depends on the type of scheme. The Pension Protection Fund is a statutory fund to protect members of defined benefit schemes if the scheme's sponsor becomes insolvent³³. It pays compensation to people who have a defined benefit or final salary pension with a company that has gone bankrupt³¹. If the employer sponsoring your defined benefit pension scheme becomes insolvent, the fund assesses the scheme to see if it can be taken on³⁴.

That protection does not extend to defined contribution pots. If your employer goes out of business and you are in a trust-based defined contribution scheme, you will get your pension, but your pension pot might be reduced because administration costs are paid by members' pension pots¹. The investment risk in a defined contribution scheme remains yours.

Your pot is also yours to keep. Your workplace pension belongs to you, even if you leave your employer in the future²³. When you change jobs your pension belongs to you, and if you stop paying into the scheme you will still get that pension when you reach the pension scheme's age³⁵. You can change your nomination for who receives the pension on death at any time³⁵.

On taking money out, twenty five per cent is tax free but Income Tax is payable on the rest¹². When a lump sum is taken, 25% is usually paid tax-free as long as the total tax-free cash taken stays within the limits, and the other 75% counts as earnings for Income Tax³⁰. The earliest a workplace or personal pension can usually be accessed is 55, and this can be checked with the provider¹⁰. A scheme may have an earlier age, usually 55¹¹.

Upcoming changes to workplace pension schemes

Several changes are already scheduled. The Pension Schemes Bill 2024-25 sets a minimum size for multi-employer DC default pension funds to create DC megafunds³³. The Government's workplace pensions roadmap puts the introduction of bulk transfers without consent for contract-based schemes at early 2028, and implementation of the Value for Money framework at late 2028.

The age at which you can take money from a workplace pension rises from 55 to 57 on 6 April 2028, unless a protected pension age applies or you are retiring because of ill health¹¹. The same change is described across the market as the normal minimum pension age moving from 55 to 57³⁰.

From April 2029 a £2,000 a year cap on National Insurance relief will apply to workplace pension contributions made through salary sacrifice. From 2030, DC master trusts will be required to hold at least £25bn in assets under management in a main scale default arrangement.

If your employer is taken over or merges, the new employer must provide access to a replacement pension that meets or exceeds the government's standards for workplace pensions, give information about the new scheme, and enrol you automatically if you are eligible¹. That is a change of scheme, not a loss of your pot.