For many of us, our pension is the biggest investment we have. So, what can you do if you want to invest your pension money ethically?
Ethical pensions: final salary schemes
These are workplace pensions where the amount of money you receive when you retire is linked to your salary. These pensions are also called ‘defined benefit’ schemes. Here, the money that’s invested to provide you with a pension is combined with that of all the other pension scheme members. It means there won’t be an ethical ‘option’ although some pension funds (such as that run by the Environment Agency pension fund), take account of environmental factors when making investment decisions.
So, what information can you expect?
– By law, you have to be given an annual statement about your pension. The trustees (the people who run the pension schemes for the members) have to produce a statement, called the ‘statement of investment principles’, which includes information about whether they take ethical, social or environmental considerations into account when making investment decisions and, if so, to what extent.
– These statements can be rather wishy washy, but they are your starting point if you want to find out how your pension money is being invested.
SAVVY TIP: If you want to know more, ask your pension scheme or HR department how you can get access to the statement of investment principles.
– In purely financial terms it’s the best type of company pension but it may give you the least choice about how and where money is invested for your retirement.
SAVVY TIP: If you’re an ethical investor, you might be tempted not to join your employer’s final salary pension scheme but it’s not something I’d recommend. Final salary schemes are so much more generous than any other kind of pension that you could lose out financially for the rest of your retirement.
What you can do
If you join your employer’s final salary scheme you can also:
– Apply pressure: put pressure on those running the pension scheme to take account of social, environmental and ethical factors.
– Set up your own arrangement to top up your pension, for example a stakeholder pension, where you’ll have a choice of ethical and green funds.
SAVVY TIP: If your employer offers an AVC (an additional voluntary contribution which is a way of topping up your pension) and they make contributions on your behalf but there’s no ethical option, think carefully before turning this down in favour of another pension as — once again — you’ll lose out.
Money purchase or defined contribution pensions
With a defined contribution scheme, money that you and your employer pay into your pension pot is held in different funds.
– An ethical or green option isn’t guaranteed. Some defined contribution pension schemes will have an ethical or green option and some may have more than one, others may not.
SAVVY TIP: The ethical or green credentials, past performance and/or level of charges may vary dramatically according to the scheme you’re in. You can’t assume that a green or ethical fund is particularly green or ethical or that it’s a good option for you, just because it’s offered by your pension scheme.
– The quality of funds on offer varies. It’s not always easy to find out whether your scheme has an ethical fund and the quality of the sustainable and green funds on offer varies widely.
SAVVY TIP: The vast majority of people (over 90%) don’t actively choose a pension fund if they’re in a defined contribution scheme. Instead their money goes into a ‘default’ fund which is hardly ever ethical or green.
– You may only have one ethical option: A typical defined contribution pension scheme might have a dozen different funds, from which one might be ethical or green.
SAVVY TIP: If your pension scheme offers one ethical or green option that doesn’t fit in with your values particularly well and/or has a history of under-performing, you face a dilemma of whether to join your employer’s scheme or make your own arrangements. Although you won’t be turning down the ‘guaranteed’ pension that a final salary scheme offers, you will be worse off if you choose your own ethical pension but have to miss out on your employer’s contributions. Don’t take this decision lightly.
Group personal pension (or GPP)
With a group personal pension, there’s no guarantee that you’d be offered a green or ethical fund as it will be down to the employer, but because there’s a larger number of pension funds than for defined contribution or stakeholder pension schemes, the chances of at least one of them being ethical or green are a little bit higher.
– This scheme might have up to 200 different funds, of which several might be green or ethical.
These pensions are aimed at self employed people or those who don’t have access to another form of pension scheme or they can be offered by your employer if they don’t have another (and generally, better) pension scheme in place.
– There may be more than one green or ethical option: A typical stakeholder pension scheme might have 25 different funds to choose from, with one or two green and/or ethical options.
SAVVY TIP: If you’re taking out a stakeholder pension in your own right (i.e. not through your employer) you can make sure you choose a pensions provider that has a good range of ethical and/or green investment funds. Some pension providers only offer one ethical fund, some have over half a dozen.
Self invested personal pension (SIPP)
These pensions are aimed at wealthier investors who want to have more freedom and flexibility about where their retirement money is invested. They’re not really suitable for people who don’t have a lot of money to invest because they usually have higher set up costs and management charges.
SAVVY TIP: SIPPs give you the most freedom of all about what you invest your money in. You can pick and mix green or ethical investment funds from all the funds available according to the amount of risk you want to take and your ethical values. You can also invest money directly in companies (and they don’t have to be listed on the stock exchange) and even in wind farms and other renewable energy projects.
There’s more information about ethical investing (including ethical pensions) on the website Yourethicalmoney.org.
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