The default: lifestyle funds

Most workplace pensions automatically place you in a "default" or "lifestyle" fund, which typically invests more heavily in shares while you're young (aiming for growth) and gradually shifts towards bonds and cash as you approach retirement (aiming to reduce risk). This "glide path" approach suits people who'd rather not actively manage their pension investments.

Choosing your own funds

Most schemes, and virtually all SIPPs, let you select your own funds instead of the default. Common building blocks include:

  • Global index/tracker funds: low-cost, broad exposure to thousands of companies worldwide.
  • Actively managed funds: a fund manager picks investments aiming to beat the market, for a higher fee.
  • Bond funds: generally lower risk and lower expected return than shares, used to reduce volatility.
  • Sector or thematic funds: concentrated exposure to a specific industry or theme, carrying higher risk through lack of diversification.

Matching risk to time horizon

The further you are from retirement, the more time your pension has to recover from short-term market falls, which is why younger savers are typically encouraged to hold a higher proportion of shares. As retirement nears — particularly if you plan to buy an annuity or take a lump sum soon — reducing exposure to volatile assets can protect against a market downturn right before you need the money.

Reviewing your choices

A pension is a multi-decade investment, but that doesn't mean "set and forget" is always right — life changes (a career break, approaching retirement, a change in risk appetite) are good prompts to revisit your fund choices. That said, reacting to every short-term market wobble tends to do more harm than good; periodic, considered reviews beat frequent tinkering.

Key takeaways

  • Default lifestyle funds automatically reduce risk as you approach retirement.
  • Most schemes allow self-selected funds if you want more control.
  • Time horizon should guide how much investment risk you take.
  • Review periodically at major life changes, rather than reacting to short-term market moves.