Pension Funds, Charges and Performance: Should You Change Fund?

Most people in workplace defined contribution pensions have never actively chosen their investments. When you are enrolled, your money goes into the default fund, and for many members, it stays there for the entire period until retirement. This may be perfectly fine, or it may be costing you returns. Understanding what your default fund does, and whether it suits your situation, is one of the highest-value pension actions you can take.

How Default Funds Are Designed

Default funds must meet standards set by The Pensions Regulator (TPR) and the Department for Work and Pensions (DWP). They are typically:

• Diversified: spread across multiple asset classes (equities, bonds, property)
• Lifecycled or lifestyled: automatically shift from higher-risk growth assets toward lower-risk assets as you approach the scheme’s assumed retirement age (often 65)
• Low cost: the charge cap for default funds in auto-enrolment schemes is 0.75% per year

The Annuity vs Drawdown Problem

Many default funds were designed for an era when most people bought annuities with their pension pot at retirement. In that model, de-risking into bonds and cash in the years before retirement makes sense: you need stability before conversion.

But if you plan to stay invested in drawdown throughout retirement, moving to bonds and cash at 60 may be the wrong strategy. You may have 25–30 more years invested, and shifting into low-growth assets too early can significantly reduce your long-term retirement income.

Check whether your default fund is optimised for annuity purchase or drawdown: this affects whether its automatic de-risking serves your plans.

Checking Your Fund’s Performance and Charges

You can find this information in your pension provider’s online portal or in annual pension statements:

• Annual management charge (AMC): Cap is 0.75% for auto-enrolment defaults. Many default funds are 0.3–0.5%
• Performance: Compare against a relevant benchmark (e.g. MSCI World Total Return Index for a global equity fund)
• Asset allocation: What percentage is in equities, bonds, cash, property, alternatives?
• Retirement assumption age: Is it aligned to when you actually plan to retire?

When It May Make Sense to Switch

Worked Example: Charge Difference Over 20 Years

Starting pot: £20,000. Monthly contributions: £300. Investment return assumption: 6%/year before charges.

A 0.55% difference in charge produces approximately £15,000 more over 20 years in this example, roughly 8%.

How to Switch Your Pension Investments

1. Log into your pension provider’s online portal or app
2. Find “Investment options” or “Change my investments”
3. Choose funds that suit your risk profile and retirement plans
4. The switch is processed, usually within a few working days
5. No tax event is triggered; no charges in most auto-enrolment schemes

Why Has My Pension Gone Down?

Common Reasons Your Pension Value Dropped

1. Stock Market Falls

This is the most common reason. If global stock markets drop:

• Equity funds in your pension lose value
• Your total pot value decreases
• Daily valuations show the impact immediately

Historical context:

These drops feel severe but are followed by recovery, usually to higher levels than before.

2. Bond Market Falls

Bonds used to be “safe” but can lose value too, especially when interest rates rise quickly. In 2022, bond funds fell 20-30%, unusual, but possible.

If your pension holds bonds (most do), rate rises hurt your pot temporarily.

3. Currency Movements

Many UK pensions hold overseas investments. When the pound strengthens against the dollar or euro:

• Foreign assets are worth less in sterling
• Your pension value drops (on paper)

When sterling weakens, the opposite happens, overseas holdings increase in value.

4. Fees Being Deducted

Your pension charges fees, typically:

• Annual management charge (AMC): 0.3% to 1.5%
• Fund costs: Built into fund performance
• Platform fees: Some providers charge separately

These are deducted from your pot, reducing the value over time. A 1% fee might seem small, but:

Check your annual statement for actual charges. (Note: the table above is a simplified illustration and does not account for compounding, the true long-run cost of a 1% fee, once lost investment growth is included, is typically higher than a simple annual multiplication suggests.)

5. Lifestyle/Target Date Switching

If you’re approaching retirement, your pension may automatically switch from:

• Growth funds (more stocks) → Cautious funds (more bonds/cash)

This “lifestyling” reduces risk but can mean lower returns, or losses if you switch right before a bond market fall.

6. With-Profits Smoothing Adjustments

Older with-profits pensions use “smoothing” to manage returns. They may apply:

• Market Value Reductions (MVRs): Penalties when you transfer or withdraw
• Bonus cuts: Reduced annual or terminal bonuses

If your with-profits pension shows a lower value, MVRs or bonus cuts may be why.

7. Contributions Stopped

If you or your employer stopped contributing:

• No new money is going in
• Investment losses have bigger impact
• Growth relies entirely on existing pot

Check you’re still contributing what you expect.

8. Transfer Penalties

If you recently transferred pensions:

• Exit charges may have been deducted
• The new provider may value differently
• Transfer timing during market falls locks in losses

Should You Be Worried?

Don’t Worry If…

✅ You’re 10+ years from retirement: Time to recover ✅ Markets fell recently: Temporary drops are normal ✅ Your contributions continue: Buying at lower prices ✅ You’re in a diversified fund: Spread across assets

Consider Action If…

⚠️ You’re very close to retirement and haven’t de-risked ⚠️ Fees are unusually high (over 1%) ⚠️ You’re in a single company or sector fund ⚠️ Your pension hasn’t recovered after 3-5 years of steady markets

What to Do About a Falling Pension

1. Don’t Panic Sell

The worst response is switching to cash after a fall:

• You “lock in” losses
• You miss the recovery
• You might buy back in at higher prices

History shows staying invested beats timing the market.

2. Check Your Fund Choice

Log into your pension account and review:

• What funds are you invested in?
• What’s the split between stocks, bonds, cash?
• Does the risk level match your timeline?

If you’re 20+ years from retirement, 80-100% in equities may be appropriate. If retiring soon, you might want more bonds/cash.

3. Review Fees

Find your:

• Annual management charge (shown on statements)
• Fund OCF/TER (Ongoing Charges Figure / Total Expense Ratio)
• Platform fees (if applicable)

If total fees exceed 1%, consider transferring to a lower-cost provider like:

• Vanguard (0.15% platform + cheap funds)
• PensionBee (0.5-0.95%)
• Your workplace pension (capped at 0.75%)

4. Consider Consolidating Pensions

If you have multiple pensions from old jobs:

• Easier to manage in one place
• May reduce fees
• Better view of total retirement savings

Use the Pension Tracing Service to find contact details for an old scheme.

5. Check Contributions

Ensure you and your employer are:

• Contributing expected amounts
• Getting employer match (don’t leave free money behind)
• Using salary sacrifice if available (NI savings)

6. Get Advice if Close to Retirement

If you’re within 5 years of retirement:

• Professional advice is valuable
• Consider how you’ll access your pension
• Review asset allocation
• Plan for sequencing risk (withdrawing during a downturn)

Most pension providers offer free guidance. Paid advice costs £500-£2,000+ but may be worthwhile.

When Falls Are Actually Losses

A pension “loss” is only real when you:

• Withdraw at a lower value than you paid in
• Transfer at a reduced value
• Annuitize when markets are down

If you’re staying invested, today’s value is just a snapshot: not a final result.

With-Profits Pensions

With-Profits at a Glance

How With-Profits Pensions Work

When you pay into a with-profits pension:

1. Your premiums are pooled with thousands of other policyholders into a with-profits fund
2. The insurer invests the fund across equities, bonds, property, and cash
3. Each year, the insurer declares a reversionary bonus: added as a percentage to your accumulated policy value
4. Once added, reversionary bonuses are guaranteed and cannot be removed
5. When you retire (or transfer), a terminal bonus is calculated to reflect the fund’s actual performance: this is discretionary and can be substantial or zero

The smoothing mechanism means your pot value does not fall on the day markets crash. In exchange, you accept that in strong bull markets, you will not see the full upside immediately.

The Market Value Reduction (MVR) Problem

The biggest risk with a with-profits pension is the market value reduction (MVR).

An MVR is applied when the guaranteed value of bonuses (what you are entitled to) exceeds what the underlying fund assets are actually worth. It is a haircut on your pot value to prevent you, as a leaver, from taking more than your proportionate share of the fund.

Worked Example

Peter has a with-profits pension with a guaranteed policy value of £180,000. The insurer applies a 20% MVR because the fund’s assets are under pressure.

Peter’s transfer value = £180,000 × (1 – 0.20) = £144,000

Peter would lose £36,000 by transferring now. If he waits until his selected retirement date (his MVR-free date), he receives the full £180,000.

MVR-free windows typically apply:

• At the selected retirement date specified in the policy
• On the policyholder’s death
• Sometimes at critical illness

Should You Transfer Out?

There is no universal answer. Consider:

Key rule: Never transfer out solely because an adviser suggests it. Advisers earn trail commission or fees from recommended replacements. Check what the adviser is earning from the transfer recommendation.

How to Find Out What Your With-Profits Pension Is Worth

1. Contact your provider and request a transfer value illustration: this shows the current value with and without any MVR
2. Ask specifically: “Is there an MVR on my policy, and what is my MVR-free date?”
3. Request your projected retirement value at your selected retirement date
4. Compare this with what you could achieve by transferring to a low-cost SIPP (after charges)

Tracing Old With-Profits Policies

Many with-profits pensions are held with companies that have been acquired, merged, or renamed. If you have lost track of an old policy:

• Use the government’s Pension Tracing Service at gov.uk/find-pension-contact-details
• Check the Association of British Insurers (ABI) for firm name changes

Old policies from the 1980s and 1990s may have guaranteed annuity rates (GARs) that are highly valuable: always check before transferring, as GARs are lost on transfer.

See our pension consolidation guide, defined benefit early retirement guide, and SIPP guide.

Related Guides

• Workplace Pensions hub
• Group Personal Pension Explained
• Pension Drawdown Guide
• Master Trust Pension Explained