Revealed: pension savers ditch investment trusts and favour passive funds

Pension savers are choosing passive funds and individual shares for their portfolios, and taking bigger tax-free sums earlier from their pots, as they navigate a changing retirement landscape.

This is the finding of a large pension study by Interactive Investor (ii), the UK’s second biggest investment platform with more than 500,000 customers.

It looked at the behaviour of its self-invested personal pension (Sipp) investors both now (during the second and third quarters of 2025) and in the past.

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The study shows that passive funds are in fashion, with allocations to exchange-traded funds (ETFs) increasing for those saving for retirement and those withdrawing money from their Sipps.

Interestingly, it also found that customers bought more individual shares, with allocations at their highest level in three years (since the first quarter of 2022).

However, pension investors also enjoy low-risk, cash-like returns. The most popular fund among ii’s customers is the Royal London Short-Term Money Market Fund. Indeed, five of its ten top-selling funds last month were money market funds.

Money market funds have been particularly popular over the past year or so, as investors sought high interest funds off the back of a high Bank of England base rate (though the base rate is now declining).

Over at AJ Bell, another investment platform, the Royal London money market fund has been its fourth best-selling fund so far in 2025. Cash funds and money market funds also dominate the most-bought investments on the Fidelity platform.

ii noted in its Sipp study that retired customers taking cash out of their portfolios are choosing money market funds: a money market fund is now the most popular holding for customers in pension drawdown for the first time.

In terms of investments that have fallen out of favour, demand for investment trusts is cooling. Investing in trusts reduced for customers saving into their Sipps, and even further for those in drawdown, according to ii.

A changing pensions landscape

The findings come as pension savers grapple with a raft of upcoming changes. Pensions are set to be included in inheritance tax calculations from April 2027. A year later, in April 2028, the age at which you can start withdrawing money from your pension will rise from 55 to 57.

Meanwhile, the Autumn Budget announced that salary sacrifice pension contributions above £2,000 will face National Insurance from April 2029.

The run-up to last month’s Budget caused a rush among older pension savers to grab their tax-free cash in case the chancellor reduced it or introduced a cap. In the end, no changes were announced.

Interactive Investor’s study shows that customers took a slightly earlier and bigger tax-free lump sum on average this year, compared to its previous Sipp study, possibly due to worries over the Budget.

Looking ahead, Kyle Caldwell at Interactive Investor thinks investment trusts could come back into fashion.

He says that high interest rates have reduced demand for investment trusts while boosting demand for gilts and money market funds. “Another factor at play has been the continued strong performance of global stock markets, which has led some investors to seek out global ETFs, which provide the return of the market for a low fee.”

Caldwell notes: “While time will of course tell, the coming years could see increased appetite for investment trusts. Interest rates are falling, which could see investors increase risk in their pursuit of growing money in real terms given that this will dent the income attraction of lower risk assets like cash and bonds.”