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Pensions

Confused about how your pension works? Read below to see how you can make yours be invested for a better future.

Last Updated: January 2021

In the UK, there are two main types of pension that you could receive in addition to the state pension when you reach retirement age. These are termed Defined Benefit and Defined Contribution: 

  • Defined Benefit (DB): Also known as final salary pensions, the amount you receive as your pension is guaranteed by your employer and depends on your length of service and final salary.  The employer takes control of managing the pension pool, meaning you have no personal choice in how your pension is invested. This type of pension is most common for older employees in large companies and those working in the public sector.

  • Defined Contribution (DC): DC pensions come in two main forms: either through a personal pension that you contribute to yourself and pick your own investments (such as a SIPP), or an occupational scheme in which both you and your employer contributes to. These contributions are then invested either into investments of your choice, or the default option that the pension provider provides. Since 2012, this type of pension is compulsory for all employees if they do not have an existing pension. 

In short, your pension can be invested in three ways of varying levels of control from you. We outline these, and how you can adopt a more ethical approach to your pension- however it may be invested- below.

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Element of Control

You directly choose your investments- often investment funds- through an account either you or your employer have chosen

Your employer chooses the investment platform, but you have some control in choosing your investments, usually offered through a set number of model portfolios

Your pension is invested on your behalf, without your control

Types of Accounts

SIPPs, Personal Pensions, Stakeholder Pensions, Non Trust Workplace Pensions

Master Trusts (Trust-based workplace pension)

Defined Benefit schemes

 

Direct Control: SIPPs, Personal, Stakeholder and non- Trust Workplace Pensions

With these types of pension, you have direct control of your pension options. You have to choose your own investments, or increasingly there are model portfolios you can choose from. 

With a SIPP and Personal Pension, you have to choose your own investments or choose a model portfolio to invest in at the outset.

With Personal, Stakeholder and some Workplace pensions, often you will be automatically invested into the pension provider's default fund. You can change this and choose your own investments, but the range of funds that you can invest in will depend on your provider.

Take a look at our Fund Finder to look at potential investment funds for you to invest into. 

 

Additionally, we outline the personal pensions that have an ethical focus or that have ethical model portfolio options below.

Traditional Providers

Roboadvisors

 

Interactive Investor SIPP

One model ethical portfolio focusing on long-term growth

Click here to go to site

 

Interactive Investor has one model ethical portfolio, which is growth orientated (80%+ is towards equities) and made up of ten ethically-focused funds, which are chosen and constantly reviewed by their team. 

The platform also has a strong section on ethical investments with well researched suggestions of funds to invest in.

Specialist Ethical Platforms

+ Pros

- Good for those looking for a growth focused portfolio managed on your behalf

- Really strong in-house ethical fund research 

- Strong portfolio performance 

- Cons

- Not suitable for those looking for a lower risk portfolio

- More expensive than many other options, though does invest into best-in-class active funds

Risk Profile: Growth (higher risk)

Performance: +25.7% in 2020; +27.4% since launch (to 31 Dec 2020)

Launch Date: 1 Oct 2019

Number of funds: 10

Active or Passive?: All Active

Platform fee: £20 p/m (then can get access to other accounts e.g. an ISA for free)

Portfolio fee: 1.09% p/a

Fee on a £100,000 portfolio: £1,330 p/a

 

Bestinvest SIPP

One multi asset fund-of-funds with an ethical focus- Tilney Sustainable Portfolio

Click here to go to site

 

Bestinvest offers one model ethical portfolio, which is a standalone investment fund-of-funds, the Tilney Sustainable Portfolio fund.

This is a multi-asset portfolio with a 'balanced' (i.e. medium risk) focus. While the majority of the funds have a sustainable or ethical focus, not all of the investments in the portfolio have this.

+ Pros

- Good for those looking for a balanced portfolio managed on your behalf

- Has one of the longest track records for a model portfolio

- Cons

- Not all investments within the fund have a dedicated ethical mandate

- Unclear what c.35% of the fund is invested into 

Risk Profile: Balanced (medium risk)

Performance: +5.4% in 2020; +24.2% since launch (to 31 Dec 2020)

Launch Date: Nov 2017

Number of funds: 10+ (top 10 make up 63% of the fund)

Active or Passive?: Mix

Platform fee: up to £250,000: 0.3% pa; to £1m: 0.2% pa; beyond: Free

Portfolio fee: 1.45% p/a

Fee on a £100,000 portfolio: £1,750 p/a

 

AJ Bell SIPP

Recently launched portfolio with a focus on globally diversified equity ETFs

Click here to go to site

 

AJ Bell have recently launched their model ethical fund-of-funds portfolio, which uses passive ethical ETFs to create a globally diversified and largely equity focused portfolio.

While it has only recently launched, the funds within the portfolio are well established and have been operating for a number of years.

+ Pros

- Good for those looking for a medium-high risk, globally diversified portfolio managed on your behalf

- Overall low cost for those conscious of fees, with the portfolio fee capped at 1%

- Cons

- Has only recently launched so very limited track record

- The fund only uses low cost ETFs, so the 1% portfolio fee is actually quite high

Risk Profile: Balanced - Growth (medium/ high risk)

Performance: n/a (too early to tell)

Launch Date: 23 Nov 2020

Number of funds: 12

Active or Passive?: Passive

Platform fee: up to £250,000: 0.25% pa; to £1m: 0.1% pa; to £2m: 0.05%pa; beyond: Free

Portfolio fee: 1% p/a (capped)

Fee on a £100,000 portfolio: £1,250 p/a

 

PensionBee

Recently launched portfolio with a focus on globally diversified equity ETFs

PensionBee_Logo_2020-1-1.png

Click here to go to site

 

PensionBee launched in 2014 and aims to make pensions simple to manage by combining your existing accounts and managing your pension through its intuitive platform. It has three dedicated ethical options- Fossil Free Fuel, Future World and Shariah. This reviews focuses on the first two options. 

+ Pros

- Clear and intuitive platform, designed to be easy to transfer existing pensions to

- Strong ethical options available, good for those looking for higher risk, equity portfolios

- Cons

- The portfolio options are passive ETFs, so the portfolio fees could be considered high

- Equity only ethical options, which do not adjust automatically as you approach retirement

Risk Profile: Growth (higher risk)

Performance: Fossil Free Fuel: (too early to tell); Future World: 1 year to Q3 2020: -0.3%; 3 years to Q3 2020: +6.9% (annualised)

Launch Date: Fossil Free Fuel: Dec 2020; Future World: Feb 2017

Number of funds: n/a

Active or Passive?: Passive

Fee: Fossil Free Fuel: 0.75% pa; Future World: 0.95%

Fee on a £100,000 portfolio: Fossil Free Fuel: £750 p/a; Future World: £950 p/a

Fossil Free Fuel: The fund is invested into the FTSE TPI Global (ex Fossil Fuels) Equity Index fund, which excludes fossil fuels and tobacco sectors, and only invests into companies which have been assessed to be well placed to meet the goals of the Paris Agreement (i.e. a low carbon world).

 

Future World: The fund is invested into the L&G Future World fund, a globally diversified equity fund which integrates ESG criteria and ethical restrictions into the investment process, in addition to the firm's Climate Pledge- which focuses on how they can influence companies to transition to a low carbon world. 

L&G's Climate Pledge

 

Nutmeg SIPP

Uses passive ETFs to build an ethical fund, with 10 portfolios to choose from based on your risk profile

Click here to go to site

 

Nutmeg is one of the largest and best-known roboadvisors in the UK. You input your risk level (from 1 (very low) to 10 (very high), and Nutmeg builds a diversified portfolio of passive ethical ETFs based on your profile, which they then monitor and manage on your behalf.

+ Pros

- Plenty of options to customise the portfolio based on your risk appetite

- Cost-conscious option, with platform fees falling to 0.35% after £100,000

- Cons

- Minimum investment of £500

- Not all of the investments within the portfolios have a dedicated ethical focus

Risk Profile: 10 risk levels to choose, from low to high 

Performance: For Mid Risk: +7.7% in 2020; +13.8% since launch (to 30 Nov 2020)

For High Risk: +9.4% in 2020; +18.4% since launch 

Launch Date: 30 Sep 2018

Number of funds: 14 in total

Active or Passive?: Passive

Platform fee: up to £100,00: 0.75% pa; beyond: 0.35% pa

Portfolio fee: Average 0.31% p/a

Fee on a £100,000 portfolio: £1,060 p/a

 

Wealthify SIPP

Uses active and passive funds to build a portfolio based on 5 risk profiles

Click here to go to site

 

Wealthify is another large and well-known roboadvisor. You input your risk level (from 1 (very low) to 5 (very high), and Wealthify builds a diversified portfolio based on your profile.

Unlike many other model portfolios, Wealthify uses a blend of passive and active funds to try and achieve a portfolio that is more ethically-aligned than a solely passive portfolio.

Risk Profile: 5 risk levels to choose, from low to high 

Performance: For Mid Risk: +9.0% in 2020; +20% since launch (to 31 Dec 2020)

For High Risk: +13.4% in 2020; +29% since launch 

Launch Date: Feb 2018

Number of funds: 18 in total

Active or Passive?: Mix

Platform fee: 0.6% pa

Portfolio fee: Average 0.56% p/a

Fee on a £100,000 portfolio: £1,160 p/a

+ Pros

- The only roboadvisor that uses active as well as passive funds to construct ethical portfolios

- Longest track record out of the roboadvisors

- Cons

- The only roboadvisor that uses active as well as passive funds to construct ethical portfolios

- Not all of the investments within the portfolios have a dedicated ethical focus

 

Wealthsimple SIPP

Uses passive ETFs to build an ethical portfolio based on 9 risk profiles

Click here to go to site

 

Wealthsimple is an award-winning roboadvisor. You input your risk level across a spectrum from low to high, and Wealthsimple builds a diversified portfolio of passive ethical ETFs based on your profile, which they then monitor and manage on your behalf.

Risk Profile: 9 risk levels to choose, from low to high 

Performance: Not outlined

Launch Date: Not outlined

Number of funds: 10 in total

Active or Passive?: Passive

Platform fee: up to £100,000: 0.7% pa; beyond: 0.5% pa

Portfolio fee: Average 0.27% p/a

Fee on a £100,000 portfolio: £770 p/a

+ Pros

- Plenty of options to customise the portfolio based on your risk appetite

- Cost-conscious option, with the fee on a £100,000 portfolio only £770 per year

- Cons

- Historic performance isn't outlined so difficult to tell how the portfolios have fared

 

Abundance SIPP

Specialist impact investment platform that facilitates direct equity and fixed income investments 

Click here to go to site

 

Abundance is a specialist ethical investment platform which allows savers to directly fund green infrastructure projects in the UK. Abundance has invested over £110 million, successfully funding over 45 projects. There are usually only 1 or 2 projects open for funding at one one time, and these investment are often illiquid and for the long term. You can, however, trade investments on Abundance's marketplace, which can help you to diversify your investments.

+ Pros

- Particularly innovative SIPP option, investing directly into green projects in the UK, with a good amount of detail

- Range of different investment options with different risk profiles

- Cons

- Given its project-based approach, it may not be the best option if you want to have money always invested 

- Risk can be higher as you are invested into a few specific projects 

Risk Profile: Project dependent

Performance: Project dependent; investments typically target from 5 to 15% pa

Launch Date: SIPP launched in early 2016

Typically 2-3 open investments; marketplace is always open

Active or Passive?: Active

Platform fee: £360 set up fee; £200 p/a

 

Some Control: Master Trusts

 

Most pensions in the UK are now invested through a Master Trust. If you are self-employed or work for a small or medium sized business, it is most likely that your pension is invested into a Master Trust. A Master Trust is a workplace pension scheme, and offers the same pension solution to many employees of different employers. There are several dozen authorised providers of these in the UK, but a few dominate in terms of size and number of savers.

 

Master Trusts don't offer a selection of different funds that you can choose and invest into. Instead, they have a selection of ready-made portfolio options, designed to keep things simpler for the average person. It is because of this that you have 'some control'.

You are automatically signed up to the Master Trust's default portfolio, with many having strong ethical investment principles and policies. In addition, many now offer ethical model portfolios that you can switch into. Below we look at some of the most popular Master Trust schemes that offer dedicated ethical options.

 

Nest (National Employment Savings Trust)

The go-to pension option for most businesses, with a 2050 net zero commitment and ethical option

Click here to go to site

Nest is the largest Master Trust pension provider in the UK, with 9.5 million members and assets of £13.3bn. It is also one of the most advanced in responsible investment, committing to net zero carbon emissions by 2050 across all of its portfolios (not just the ethical one). They offer one ethical portfolio- outlined below- and one Sharia portfolio.

+ Pros

- Largest group pension provider in the UK, with a net zero commitment across all of their funds

- Dedicated ethical fund which changes risk level based on length to retirement

- Cons

- One ethical option comprised of just five funds, meaning you don't have a great deal of choice 

Risk Profile: The Ethical option adjusts its risk based on your length to retirement, as outlined opposite

Performance: Ethical Growth:Targets inflation +3% p/a; 1 yr performance: 10.2%; 5 yr (annualised: 12.1%)

Launch Date: Not outlined

Number of funds: 5 in total

Active or Passive?: Active

Fee: 0.3% p/a

Fee on a £100,000 portfolio: £300 p/a

 

TPT Retirement Solutions

One Ethical Target Date fund which invests into passive ethical indices

tpt-logo.png

Click here to go to site

TPT manages over £12bn of assets on behalf of more than 350,000 members. It has two ethical options: its Ethical Target Date fund (so the risk level automatically adjusts as you approach retirement), and a standalone ethical equity fund which mainly tracks the L&G Ethical Global Equity Index. 

+ Pros

- Long track record into established passive funds

- Risk level adjusts automatically over time, meaning you don't have to manually monitor

- Cons

- Not a great deal of clarity on exactly what the fund is invested into

- Fees could be considered quite expensive given it is a passive vehicle

Risk Profile: The Ethical Target Date option adjusts its risk based on your length to retirement

Performance: Growth Phase: 1 yr performance to Q3 2020: 3.8%; 5 yr: annualised: 9.4%

Launch Date: Not outlined

Number of funds: Not outlined

Active or Passive?: Passive

Fee: 0.72% p/a

Fee on a £100,000 portfolio: £720 p/a

The TPT Ethical Target Date funds are invested into ethical funds which track the FTSE4Good indices, MSCI World SRI indices, and UK government bonds. The actual funds and percentages of each is not readily available for review on their site.

There is more information on the Target Date funds here

And more information on the standalone equity fund here

tpt drawdown.PNG
 

L&G Master Trust

Multi-asset passive portfolio built on L&G's Future World fund series

L&G.jpg

Click here to go to site

L&G's Master Trust offers one dedicated ethical portfolio option- the Future World Multi-Asset Fund. It is a multi-asset fund with a bias towards equities, and invests into a mix of the Future World fund range from L&G. These funds are passive and track a customised index which focus on companies which meet minimum ESG criteria and standards for a transition to a low carbon economy. It doesn't automatically adjust risk levels over time.

+ Pros

- Low-cost option

- Moderate risk profile for those that are after this 

- Incorporates L&G's Climate Pledge into their investment process

- Cons

- As a multi-asset fund, the asset allocation/ risk level doesn't change over time as you approach retirement

- Newly launched fund with a limited track record

Risk Profile: Moderate risk 

Performance: 1 yr performance: 0.4% to Q3 2020

Launch Date: June 2018

Number of funds: 20+

Active or Passive?: Passive

Fee: 0.33% p/a

Fee on a £100,000 portfolio: £330 p/a

L&G's Future World fund range integrates ESG criteria and ethical restrictions into the investment process, in addition to the firm's Climate Pledge- which focuses on how they can influence companies to transition to a low carbon world. 

L&G's Climate Pledge

Link to the fund page

Key Features Document

 

Smart Pension

Choice of a target-date multi-asset portfolio or equity option

Click here to go to site

Smart Pension has a range of Target Date portfolios (which adjust in risk the closer you get to retirement), but none of these have a 100% dedicated ethical focus. You can, however, choosen two funds with a dedicated ethical focus, the Smart Ethical Global Equity Fund and Smart Future Fund.

+ Pros

- Dedicated ethical fund which changes risk level based on length to retirement

- Cons

- Newly launched funds with a limited track record

- Could be considered expensive for passive funds

Risk Profile: The Global Equity fund is high risk; the Future fund is moderate risk

Performance: Global Equity: 1 yr performance to Q3 2020: 4.8%; Smart Future: 1 yr performance to Q3 2020: -6.2%

Launch Date: Global Equity: April 2018; Smart Future: April 2019

Number of funds: Smart Future: 5+

Active or Passive?: Passive

Fee: 0.75-0.87% p/a

Fee on a £100,000 portfolio: £750-870 p/a

Smart Ethical Global Equity Fund: This is the L&G Ethical Global Equity Fund, but rebranded. It aims to track the performance of the FTSE4GOOD Global  Equity Index, which only includes companies they determine have strong ESG practices, and excludes companies operating in certain sectors such as tobacco. The difficulty with investing into this fund is that it is 100% global equities, which may be too high risk for some savers, especially the closer retirement age approaches. The annual fee for the Smart Ethical Global Equity Fund is 0.87%.

 

Smart Future Fund: The aim of the Smart Future Fund is to replicate the performance of Smart Pension’s default (moderate risk) model portfolio, but weights each investment depending on their ESG performance. It invests into the L&G Future World fund series (outlined a little more in the box above). The annual fee for the Smart Future Fund is 0.75%.

 

Out of Direct Control: Defined Benefit 

If you have a Defined Benefit pension, you have a very limited say in how your money is invested. You will have to do some research into whether your scheme takes environmental and social considerations into its investment process. This can be done by contacting your pension provider.

 

If you are a current or former employee in the public sector with a defined benefit pension, on the whole these pension funds take responsible investment seriously.

If you have a defined benefit pension from your employment with a large corporate, these vary in their approach to responsible and ethical investment. A table summarizing the largest of these is below, and can be accessed here.

There are several advocacy groups such as ShareAction, Fossil Free UK and Make My Money Matter that are trying to make Defined Benefit pension schemes go greener. You can get more information and become involved in lobbying your own pension provider by reading and using their materials.