Although it is something you may have heard many times before, the earlier you start investing for your retirement, the better. But if you can invest in a pension to give you the lifestyle you deserve in retirement and help the environment and the way people are treated, wouldn’t that be something for which to aspire?
| What is an ethical fund? | An ethical pension invests in companies that align with an investor’s ethics, morals and social aspirations; investments considered harmful to society or the environment |
| ESG stands for? | Environmental, Social, and Governance |
| Are ethical funds a good investment? | Ethical funds are a good investment but remember that no investment is without risk. However, research shows that ethical funds outperform traditional funds |
| Are there ethical pension funds? | Yes, you can have ethical investment pensions. Please check with your pension provider |
The good news is that you can indeed do both, if you invest in an ethical pension fund.
You don’t get much choice as to how your state and workplace pensions (if you have one) are funded. It’s also likely that, regardless of how they are funded, on their own, they won’t be enough to grant you the lifestyle you would hope to enjoy in your retirement.
Not only will a private pension or investment fund likely make up for any shortfall, but you can also choose how the fund’s investments are made. You can opt for an ethical pension fund.
What is an ethical pension?
An ethical pension fund is one where the investments are focused upon an investor’s ethics, morals and social aspirations. It could be an ethical stakeholder pension, an ethical SIPP (Self-Invested Personal Pension), or some other type of ethical retirement investing vehicle like an ethical ISA.
Whichever vehicle to choose, ethical or sustainable, you will invest in companies that uphold their social responsibilities to their staff and the world, and produce healthy products from sustainable materials, avoiding things like fossil fuel production. ESG funds do just that.
What are ESG funds?
The initials “ESG” stand for “Environmental, Social, and Governance.” ESG Funds are funds that focus on investing primarily to support businesses that strive to uphold ESG philosophies and contribute positively to the environment in one way or another. Given those prerequisites, generating good returns from investing in a sustainable fund focused on products such as renewable energy is of equal importance.
Is your pension already ethical?
You should be given an annual statement if you have a workplace pension. It should indicate where your money is invested. Most providers of workplace pensions do have ethical investments available, but not as a default fund – you normally have to request them specifically.
If you have a stakeholder pension or a SIPP, ethical investing is your choice. Having become aware of the possibility of ethical investment pensions, you may want to initiate a pension transfer – that is your prerogative.
If you are unsure of what ethical personal pension plans are available, you can always check with your fund manager if you have one.
Where can you find ethical pension funds?
There are many pension options open to you, but there are not so many ethical pension providers around. Nevertheless, the UK’s biggest pension providers have promised to offer “net-zero,” or neutral carbon emissions in their prime pension plans by 2050. It is a step in the right direction, but many feel the pace could, and should be, upped.
But don’t get too hung up on the word “pension.” When it comes to arriving at the best ethical pension funds, there are other ways of skinning the ethical retirement investing cat – EGS ISAs, for example.
An ESG ISA can work as well, if not better, than some ethical pension schemes. The main advantage for pension savers is that pension plans allow you better tax concessions, regardless of whether they are based on ethical pension funds.
The benefits of having an ethical private pension
An ethical pension investment fund may appease your inner conservationist. Also, with a pension, you can invest and get tax relief on 100% of your salary, or up to £40,000 (your annual allowance), whichever is lower. With an ISA, you can only invest up to £20,000 per annum.
The benefits of ethical investing via an ESG stocks and shares ISA
But, £20,000 is more than most people can afford anyway, so an ESG ISA is an option, especially if you want to access your funds before reaching your retirement age.
Before the pension flexibilities, freedom, and choice reforms commenced in April 2015, most people used to buy annuities with their pension pots on retirement. But after the new freedoms were in place, you can access as much of your pension pot as you wish, while withdrawing 25% tax-free.
With no restrictions on what you do with your pot, more people are looking at investing all or part of their pension pots in sustainable investment options. So, you can now create your own best ethical pensions funds vehicle, which, for many people, is an ESG Stocks and Shares ISA.
Are there any reasons to be cautious about ethical pensions?
If you know how to invest money, you might decide to create a sustainable investment using the SIPP structure. However, SIPPs are only really suitable for those experienced in dealing with stocks and shares.
Another option is investing in a stakeholder pension. The only problem going down this route is that the choice of funds is very limited. You have a much better choice with a SIPP or an ESG ISA.
Some people are cautious about ethical pensions or funds, thinking they might not perform as well as non-ESG options. However, the results over the past couple of years refute that. In fact, ethical or sustainable funds have outperformed their non-ESG cousins.
The risk of investing
When you choose to invest rather than save, there is an element of risk involved. There are, however, two acknowledged ways of mitigating risk:
- Investing long term
- Having a diverse investment portfolio
The first one – long term – is dealt with because we are talking about pensions. They are always long-term investments.
As for diversification, that is why SIPPs and ISAs are better options than stakeholder pensions. There are more funds from which to choose, so you can make sure the pension is invested as diversely as you wish.
Making the right choice
With so many pension options open to you, it can be a little confusing. If you do decide to go down the ethical pension fund route, you must make sure that you choose a pension provider that is regulated by the Financial Conduct Authority. It is the most important thing when dealing with any money matter – including setting up an ethical pension fund or an ESG ISA.
Remember that we are talking about your retirement funds. You cannot afford to make a mistake, so using a specialist firm of independent financial advisers is critical.
FAQ
Which type of pension is more ethical?
No type of pension is more ethical than the other. The term ‘ethical’ depends on your needs and preferences, and there is no one definition. However, personal pensions offer greater control over your investments and provide more flexibility, so you can be more selective about where your money goes.
How can I know if my pension is ethical?
Check your pension providers’ official site for details about their current products. If you can’t find what you are looking for or need more information, you can give them a call.
What are the benefits of having an ethical pension?
Ethical pensions might offer you the chance to invest money while doing your bit for the environment. An ethical pension helps its clients withdraw support from companies that may be guilty of unethical behaviour, such as community and environmental resources exploitation. This encourages companies to be transparent about their ethical practices.
*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.
