Best pension fund

Many pension schemes, especially workplace pensions, have a default pension fund that your contributions will be invested into if you don’t take any action when you open the scheme. Often, this is a “lifestyling” fund that reduces the risk level of your pension investments as you approach retirement age. But regardless of whether you proactively chose your initial pension fund, you don’t have to stick with it. Most pension providers will offer a range of pension funds, and it’s worth reviewing which one is best for you.

What is a pension fund?

A pension fund is an investment product that is designed to help you save for your retirement. Pension funds are made up of a portfolio of assets, which can include shares, property, bond, and specific investment funds. As well as your own contributions, tax relief and any workplace pension contributions from your employer will also be invested in your pension fund.

Pension funds hold the investments of large numbers of people saving for retirement. In most cases, a pension manager will be responsible for choosing the specific assets included in your pension fund, though you will have some say over the nature of your fund.

Do pension providers offer a choice of pension funds?

Yes, although the nature of the choice will depend on the type of pension you have. Most people these days save into a defined contribution pension (defined benefit workplace pensions work differently), and there are 3 broad types:

• Workplace pensions, which are set up by your employer and both you and they pay into. Workplace pension schemes typically have a default fund, which you will pay into if you don’t change it. But they will often have a few other options for you to choose from. For example, one that is more or less risk-averse.
• Standard personal pensions. You open and pay into these pensions yourself – for example, if you don’t have access to a workplace pension, or want to pay in more than your workplace pension allows. When you open a personal pension, you’ll often be asked to choose the nature of the fund you want to invest in. You might be given a choice of risk levels, or asked to pick a type of portfolio that most closely meets your goals and preferences. For example, a fund that focuses on sustainable investing, or one that reduces your risk levels as you approach retirement (often called a “lifestyling” fund).
• Self-invested personal pensions (SIPPs). These are a type of personal pension where management of your pension investments is down to you – you are responsible for choosing the specific investment assets that make up your pension fund and buying/selling them as you see fit. You therefore have nuanced control over how much risk you want to take at different stages, and need to pay closer attention to your pension’s performance.

How do I choose the best pension fund?

The nature of the choices you’ll need to make will depend on the type of pension you have, so that’s your first consideration. If you have a workplace pension, you’ll be limited by the options available through it, but it’s worth taking time to review whether the alternatives to the default would be better for you based on your personal preferences, retirement goals, and appetite for risk.

If you’re opening a personal pension, check the options available carefully, as some offer more choice of funds than others. Generally speaking, standard personal pensions ae better for less experienced investors who want a more hands-off approach after they’ve chosen the broad type of portfolio they want. As with workplace pensions, your choice of funds in a standard personal pension will usually be dictated by appetite for risk, retirement goals, and personal preferences. Some pension providers offer tools or questionnaires to help you choose.

A SIPP might be the right choice if you’re an experienced investor who wants to take more control over your finances, as you can pick and choose the assets that make up your pension fund. Different SIPP providers will offer a different range of options. For example, some specialise in offering a range of exchange traded funds, while with others you can mix and match from a wide range of assets, including shares in individual companies, or specific investment funds that appeal.

There can be a lot of factors at play when choosing the specific assets that make up your SIPP. Personal preference, goals and appetite for risk will still play a key part, but you will also need to look more closely at investment performance of individual assets (though bear in mind past performance doesn’t necessarily reflect future performance) and make sure you diversify your portfolio.

How can I change pension funds?

Assuming you want to stay with the same pension provider, changing pension fund should be fairly straightforward.

If you have a standard personal pension or a workplace pension, the first step is to double check what pension funds are available from your provider. Most publish details of these on their websites, but if not you can call and ask for information.

Then, once you’ve chosen your fund, request the switch. If you have an online account, some schemes will let you log in to switch funds. Otherwise, a quick phone call should get the job done.

If you have a SIPP, you usually have more flexibility to change the specific assets in your pension fund as and when you wish, using your provider’s investment platform.

If you’re considering making substantial changes to your pension fund, and need some help assessing the pros and cons of doing so, it could be worth speaking to a professional financial adviser first.

Active funds vs passive funds

Passive funds replicate and track an index (such as the FTSE 100). The idea is that the returns will mimic those of the index the fund is tracking (minus investment fees). Returns will never be able to beat the relevant index. The strategy minimises buying and selling in order to save costs.

With active funds, on the other hand, a dedicated fund manager tries to pick the best stocks with the goal of beating the returns you can get from passive investing. While this might seem like a good idea, human beings are fallible. So you have at least as much chance of an active fund underperforming a passive fund. That’s particularly when you take into account the higher fees you’ll pay for the fund manager to actively manage your account.

The type of pension fund management you opt for is ultimately your call, but if in doubt it’s wise to seek financial advice.

What are the risk levels for pension funds?

The risk level for any investment fund, including pension funds, indicates how likely it is that an investment will fail to perform against expectations. Higher-risk funds tend to also come with higher potential reward – so you’re effectively balancing off the chance of greater returns against the possibility of loss.

Some pension funds will use numbers to indicate their risk rating (with 1 being the lowest and 7 being the highest, for example). Others may use fund descriptions – such as cautious, balanced or aggressive – to help you choose.

The right risk level for you will depend on your risk appetite and life stage. For example, a younger person with plenty of time for their pension to ride out any market volatility may be in a position to take more risk than someone who is close to retiring.

Bottom line

Even if you don’t have a SIPP, that doesn’t mean you have no say over how your pension savings are invested. Personal pensions may have more options, but even workplace pensions should offer a choice of pension funds. Switching to a different pension fund should be pretty straightforward if you want to – check your online account or call your provider to ask about your options. It’s an important decision, though, so weigh up your options carefully and – if in doubt – seek professional advice.

Frequently asked questions

• Which pension fund has the highest return?

  There’s no clear-cut answer to that, as different funds will outperform others at different times. One fund might be the best performer in a given year, but over a 5-year period it could well be outstripped by another. Of course, it’s well worth looking at a fund’s previous performance as one measure when assessing what to invest in. However, it shouldn’t be the only thing you consider. For some pension investors, long-term, stable but not sensational returns may be a better choice than a higher-risk, potentially higher-reward alternative.

• Do I need to change pension funds?

  There’s no obligation to switch pension funds, and for many people their provider’s default will be a good choice. Often, this is a lifestyling pension fund that reduces the risk level of your fund’s investments as you approach retirement and may need to start drawing on your pension. However, for others the default may not suit their preferences (for example if you want to invest only in ethical funds) or their retirement plan (for example, if you plan to leave most of your pension invested well beyond retirement age). So while you don’t need to change pension funds, it’s always good to assess your options and make sure your pension fund is right for you.

Written by

Zoe Stabler DipFA

Senior writer

Zoe was a senior writer at Finder specialising in investment and banking, and during this time, she joined the Women in FinTech Powerlist 2022. She is currently a senior money writer at Be Clever With Your Cash. Zoe has a BA in English literature and a Diploma for Financial Advisers. She has several years of experience in writing about all things personal finance. Zoe has a particular love for spreadsheets, having also worked as a management accountant. In her spare time, you’ll find Zoe skating at her local ice rink. See full bio

Zoe's expertise

Zoe has written 176 Finder guides across topics including:

• Share dealing
• Reviews and comparisons of trading platforms
• Robo-advisors
• Pensions
• Banking