Smoothed and With-Profits Funds Explained: What to Consider (2026 Guide)

Smoothed and with-profits style funds are pension investments that spread out the ups and downs of the markets, so the value you see each day moves more steadily than the underlying investments. They can suit people who want a calmer ride, but they are not guaranteed: the provider can cut the value you receive if markets fall sharply, and charges can be higher than simpler funds. Whether one is right for you depends on your circumstances, so treat this guide as general information rather than a recommendation of any fund or provider.

For many years, smoothed funds were widely used for pension money, including money transferred out of defined benefit (DB) schemes. This guide explains how they work, why people use them, the risks to understand, and how they compare with other ways of investing a pension.

Important: This article is for education only. It is not financial advice and does not recommend any product or provider. Investments can fall as well as rise, and you may get back less than you put in.

Start With the Bigger Decision

Before thinking about where pension money might be invested, it's worth remembering the decision that comes first if you have a DB pension.

A DB pension pays a guaranteed income for life, usually with inflation increases and a pension for a surviving spouse or civil partner. Transferring out means giving those guarantees up permanently in exchange for an invested pot.

• The FCA's starting assumption is that a transfer is unlikely to be suitable for most people.
• If your safeguarded benefits are worth more than £30,000, the law requires you to take advice from an FCA-authorised adviser with the pension transfer permission before you can transfer.
• Since October 2018, that advice must include the investments the adviser would recommend for the transferred money. So the choice of fund is part of the transfer advice, not an afterthought.

Our guide to defined benefit pensions explains what you would be giving up.

What Is a With-Profits Fund?

With-profits funds are one of the oldest types of pension and life insurance investment in the UK. Your money is pooled with other policyholders' money and invested across a mix of assets, such as shares, bonds, property and cash. Rather than passing on investment returns directly, the insurer shares out profits over time.

There are two broad types:

• Conventional with-profits: your plan has a guaranteed sum that grows through annual (regular) bonuses, with a possible final (terminal) bonus when the plan ends. Once added, annual bonuses usually can't be taken away, although a market value reduction can still apply if you leave early.
• Unitised with-profits: your money buys units whose price grows in line with the bonus or growth rate declared by the insurer. Most modern smoothed pension funds work along these lines.

How Do Smoothed Funds Work?

The defining feature of a smoothed fund is that its unit price doesn't track the daily movements of the underlying investments. Instead, the provider uses a smoothing process. The details differ between providers, but the general approach looks like this:

• An expected growth rate: the provider sets a rate at which the unit price is expected to rise, based on its view of long-term returns for the fund's mix of assets. This rate is reviewed regularly.
• A smoothed price: the unit price rises gradually in line with the expected growth rate, rather than jumping up and down with the markets.
• Adjustments: the provider compares the smoothed price with the actual value of the underlying investments. If they drift too far apart, it can adjust the smoothed price up or down to bring them closer together.
• Market value reductions (MVRs): if you take money out or transfer away when the underlying value is well below the smoothed value, the provider can reduce the amount you receive. This protects the policyholders who stay in the fund.

Each provider explains how its fund is managed in a document called the Principles and Practices of Financial Management (PPFM), along with a shorter customer-friendly version. Under the FCA's rules, firms running with-profits funds must publish these and manage the fund in line with them. They are worth reading before you invest.

Key consideration: market value reductions

A smoothed fund is not a guaranteed fund. If markets fall sharply, the provider may apply an MVR when you withdraw or transfer, which means you could receive less than the value shown on your statement. Some plans promise that no MVR will apply on certain dates or events, such as death or a set retirement date, so check exactly what your plan says. MVRs are particularly relevant if you need to draw money out during a market downturn.

Why Have Smoothed Funds Been Popular?

Someone who has spent years building up a secure pension is often cautious about investment risk, especially as they approach or enter retirement. Smoothed funds have features that appeal to that mindset:

• Less visible volatility: smoothing reduces the day-to-day swings in value that many people find stressful, particularly when they are taking an income.
• Steadier progress: over many periods, smoothed funds have shown steadier growth than funds that invest directly in shares, though usually with lower returns than shares over the long term. Past performance is not a reliable guide to the future.
• Diversification: they usually invest across many types of assets, which spreads risk.
• Familiarity: with-profits funds have a long history in the UK, which gives some people comfort.

The Drawbacks and Risks to Understand

Smoothed funds also have important limitations.

• No guarantee: smoothing reduces visible volatility but doesn't remove investment risk. MVRs and downward price adjustments can and do happen.
• Charges: the total cost of a smoothed fund, including product and platform charges, is often higher than a simple low-cost index fund. Some of the cost of smoothing may not be visible as a separate charge.
• Complexity: it can be hard to see exactly how the smoothed price relates to the underlying investments, or how the provider uses its discretion.
• Provider discretion: the provider decides the expected growth rates, adjustments and MVRs, within the rules in its PPFM.
• Restrictions: some plans limit how you can switch or withdraw, or apply different rules to different types of withdrawal.
• Concentration on one provider: your money depends on how one insurer manages one fund. The Financial Services Compensation Scheme (FSCS) protects you if an insurer fails, but it doesn't protect you against investment losses.

Other Ways a Pension Can Be Invested

Smoothed funds are only one option. Since the pension freedoms in 2015, the range of approaches has grown considerably. The main types, in general terms, are:

Passive Index Funds

These aim to follow a market index, such as a global share index or a bond index, rather than beat it. Their main appeal is low cost. Over a retirement that could last 20 years or more, lower charges can make a meaningful difference. Their value moves up and down with the markets, with no smoothing.

Multi-Asset and Risk-Rated Portfolios

Many advisers use ready-made portfolios that mix different assets and are matched to a risk level after a formal risk assessment. These are rebalanced regularly to stay at the chosen level of risk. Some firms call this a centralised investment proposition.

Guaranteed Income and Hybrid Options

Some people use part of their pension to buy an annuity, which provides a guaranteed income, and keep the rest invested for flexibility. There are also fixed-term annuities that pay an income for a set number of years. MoneyHelper explains the options for taking a guaranteed income.

Responsible and Sustainable Investing

Many people want their pension invested in a way that reflects their values. Funds that apply environmental, social and governance (ESG) criteria are available across a range of risk levels, but the approaches differ widely, so look at how each fund defines and applies them.

Risk Profiling: The Starting Point

Whatever approach is chosen, a regulated adviser must assess your circumstances before recommending any investment. This usually covers:

• Capacity for loss: how much of a fall in value you could afford, given your income needs, other assets and commitments
• Attitude to risk: how comfortable you are with investment ups and downs
• Time horizon: how long the money is likely to stay invested
• Income needs: how much you need to take out, and how often

The right answer for a 55-year-old with a long time horizon and other assets may look very different from the right answer for a 67-year-old who needs a regular income straight away and has little else to fall back on.

Ongoing Reviews

Choosing an investment is only the start. Markets change, and so do your needs. If you pay for ongoing advice, the adviser should review whether your investments are still suitable.

Under the FCA's Consumer Duty, which came into force in July 2023, firms must act to deliver good outcomes for customers, avoid foreseeable harm and make sure products and services offer fair value. That applies over time, not just when you first invest.

What the Rules Say About Choosing Investments

FCA suitability rules mean that any investment an adviser recommends must:

• Match your attitude to risk and capacity for loss
• Meet your objectives, including income needs and time horizon
• Represent fair value, taking charges into account
• Be kept under review if you pay for ongoing advice

Since the Consumer Duty, firms have to be able to justify higher-cost options by the outcomes they are expected to deliver for customers.

Questions to Ask About a Smoothed Fund

If a smoothed or with-profits style fund is suggested to you, these questions can help:

1. What is the total annual cost, including product, platform, fund and advice charges?
2. How is the expected growth rate set, and how often is it reviewed?
3. When can the provider adjust the smoothed price, and by how much?
4. When might a market value reduction apply, and are there any dates or events when it won't?
5. Where can I read the fund's Principles and Practices of Financial Management?
6. How would regular withdrawals in drawdown work, and could they be affected by an MVR?
7. Why is this fund more suitable for me than a lower-cost alternative?
8. How has the fund been managed through past market falls?

Lump sum allowances (2026)

Since the Lifetime Allowance was abolished on 6 April 2024, the main limits on tax-free lump sums are:

• Lump Sum Allowance (LSA): £268,275 for most people. This is the maximum tax-free cash you can take from all your pensions in your lifetime.
• Lump Sum and Death Benefit Allowance (LSDBA): £1,073,100 for most people. This limits the total of tax-free lump sums paid in your lifetime and on death before 75.

These apply whatever fund your pension is invested in.

Getting Regulated Advice and Help

Deciding whether to give up a DB pension, and then how to invest the money if you do, are among the biggest financial decisions many people make. Both need regulated advice tailored to you.

Free, impartial guidance is available from MoneyHelper, and if you're 50 or over you can book a Pension Wise appointment about your DC pensions. Be wary of anyone who contacts you out of the blue about your pension or promises unusually high or "guaranteed" returns, and check the FCA's ScamSmart pages first.

I don't give pension transfer advice. If it would help, you can book a free, no-obligation chat about how DB transfers and the advice process work. It's general information, not advice. If you then want regulated advice, I can introduce you to an FCA-authorised firm that holds the pension transfer permission. Arthur Browns may receive a fee from the firm we introduce you to if you become their client. Introductions are for UK residents with a transfer value of £50,000 or more. Below that, MoneyHelper is a good place to start.

This article is general information, not advice, and does not recommend any product or provider. Please read our important information.

Frequently asked questions

What is a smoothed pension fund?

A smoothed fund is an investment, usually based on with-profits principles, where the provider spreads out the effect of market rises and falls over time. The unit price grows steadily in line with an expected growth rate rather than moving with the markets every day. The provider can adjust the price, and can reduce what you receive when you leave if the underlying investments are worth much less than the smoothed value.

Are smoothed funds a good option after a DB pension transfer?

There is no general answer. A smoothed fund may suit someone who values steadier progress, but it carries investment risk, can be more expensive than simpler funds and isn't guaranteed. Any fund used for transferred DB money is part of the regulated transfer advice and must be suitable for your own circumstances. And the FCA's starting assumption is that a transfer itself is unlikely to be suitable for most people.

What happens if I need to withdraw money and an MVR is applied?

If the provider applies a market value reduction, you receive less than the value shown on your plan. MVRs are usually applied when markets have fallen sharply and the underlying investments are worth much less than the smoothed value. Check when your plan allows MVRs and whether there are dates or events when they don't apply.

How do smoothed funds compare with passive funds on charges?

Smoothed funds often cost more in total than low-cost passive index funds, once product, platform and fund charges are added up. Whether any extra cost is justified depends on what the smoothing does for you and your plans. An adviser should be able to explain the comparison clearly as part of a fair value assessment.

Must I use the fund recommended by my adviser, or can I choose my own?

You are free to make your own investment decisions. But if you have received regulated advice to transfer a DB pension, the recommendation will normally cover how the money should be invested, and the suitability of the advice may depend on that investment strategy. If you want to invest differently, discuss it with the adviser first.

What are the lump sum allowances following the abolition of the Lifetime Allowance?

The Lifetime Allowance was abolished on 6 April 2024 and replaced by the Lump Sum Allowance (LSA) of £268,275, the maximum tax-free cash you can take from all your pensions in your lifetime, and the Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100, which limits the total of tax-free lump sums including those paid on death before 75.