Age is just a number. But when it comes to retirement, most of us would like to see that number accompanied by some larger figures in our pension pot.
After all, a comfortable retirement pot helps you live life in-line with your goals. And, with ethical investing, you can build a pension that aligns with your values, too.
An ethical Self-Invested Personal Pension (SIPP) is one way to construct a pension, or supplement your workplace one, without having to compromise on your values.
From providers who offer ethical pension plans, to the specifics of how they operate; we get into the details in our ethical pension guide.
- What is an ethical pension?
- How do ethical SIPPS work?
- Benefits of ethical pensions
- Disadvantages of ethical investing for SIPPs
- How do I invest ethically with a SIPP?
- Summary
- How to open an ethical SIPP
What is an ethical pension?
Rather than just being saved, pension contributions are invested over a number of years (typically by your pension provider).
The power of compounding means that, when you’re ready to retire, your pot could be worth more than if you’d just put that same money into a savings account.
Sounds simple enough, right?
Except you don’t always have a say in where or how that money is invested.
And that’s where ethical pensions come in.
Unlike regular pensions, the money contributed towards an ethical pension is invested according to specific criteria (which may vary slightly from provider to provider).
Generally, however, these investments are made in areas that aim to avoid harm — and have positive impacts on society and the environment.
How do ethical SIPPS work?
There are different ways ethical personal pensions can be managed. Like ethical investing more broadly, an ethical pension will usually look at areas such as those outlined below:
ESG investing
Ethical pension plans will often take into account a company’s Environmental, Social, and Governance (ESG) rating before investing in them. This is because ESG scores offer a good indication of an organisation’s overall ethics.
ESG ratings look at three key areas:
- Environmental: This means looking at a company’s environmental credentials such as energy use, waste management, and treatment of animals.
- Social: This considers how a company manages people like employees and suppliers, measuring their wellbeing, health, and equality.
- Governance: This checks how a company generally conducts business, looking at things like shareholder transparency and tax management.
Impact Investing
Some ethical pension providers may make use of impact investing, which strives to actively create positive social or environmental changes through their work. Hence, creating “impact”.
Socially responsible investing (SRI)
This investment style is generally considered to take things a step further than ESG. It takes into account a range of elements when making investment decisions, not only a company’s ESG score, but also how it actively excludes harmful industries, too.
Negative screenings
Ethical pension plans may also use negative screening, which aims to avoid investments going towards harmful industries. These generally cover areas such as fossil fuels, tobacco, controversial weapons, adult entertainment, and gambling. Often, providers will abide by the 10% rule, meaning fund providers have a 10% maximum tolerance for exposure to excluded activities.
Benefits of ethical pensions
An ethical pension could be a win-win when it comes to planning for your retirement. It allows you to build your pension pot and stay aligned with your values.
What’s more, you can do this without needing to compromise on your financial goals.
Some people may be concerned that prioritising ethical factors will impact the financial effectiveness of investing. There is, however, evidence to suggest this isn’t the case. [1]
Disadvantages of ethical investing for SIPPs
Nothing is black and white — and there are some aspects of having an ethical pension that won’t appeal to everyone.
Higher fees
As an ethical pension requires more management and oversight, some providers charge a slightly higher fee for this. In turn, higher fees might eat into the returns on your pension pot.
Greenwashing
Unfortunately, some organisations have used the growing popularity of environmental causes to disingenuously represent themselves as “ethical” — despite not making meaningful steps towards doing so. When investing ethically, this means there’s always a risk of money going towards companies not really worthy of their ethical badge.
Thankfully, following new rules implemented by the Financial Conduct Authority (FCA), firms providing ethical investment funds now “need to ensure their sustainability references are fair, clear and not misleading, and proportionate to the sustainability profile of the product and service.” [2]
Added to this, there are also four new investment labels to bring greater transparency for consumers.
Ethics vs. financial returns
As previously stated, research suggests ethical investments are as effective as conventional ones, as long as they’re managed well. [1] Otherwise, there’s a chance you could be missing out on financial returns in order to stand by your values.
Less diversification
Diversification is one of the most important principles of investing. By spreading your money across different assets, you minimise the risk of poor performance in one area — which could impact your whole portfolio. While there’s a growing number of ethical areas to invest in, excluding certain sectors could mean less diversification. This might, in turn, make your overall investment portfolio more vulnerable to risk.
How do I invest ethically with a SIPP?
There are a few different ways to establish an Ethical Self-Invested Personal Pension:
DIY portfolios
If you want full control of how your pension’s invested, you could opt for the DIY approach. This way, you can choose exactly where your money goes, judging the ethical stance and financial prospects of various industries and assets for yourself. Of course, this also comes with more responsibility, as you’ll need to keep tabs on your investments’ performance and ethical credentials. If you don’t have the time or financial knowledge, you might want to consider a managed pension instead.
Managed pensions
The main benefit of a managed ethical pension is that a provider oversees how the contributions you make are invested. Using algorithms and additional tools, they’ll determine ethical factors and investments they think might provide the best returns. While going with a provider means there will be management fees, you can at least relax and let them do the hard work for you. For example, when opting for an Ethical SIPP with Wealthify, you can rest easy knowing we’re working to try and grow your pension pot — without skimping on your ethical standards.
Transferring your pension
If you already have a pension but your provider doesn’t offer an ethical option – or you’re unhappy with your current setup in some other way – you could always transfer it elsewhere.
To transfer a pension, you first need to know where it is; tracing services can help you locate one or more pensions, if necessary.
You can then contact your new provider and let them know you plan to transfer over. Although the process varies for each provider, most will probably need the following information:
- Who your current provider is.
- Your reference number.
- An estimated value of your pension.
You should be able to find this information using a recent pension statement, or by contacting your current provider directly.
The transfer process usually takes 2–6 weeks.
It's important to remember that combining two or more pensions doesn’t guarantee more money in retirement. Likewise, investment performance is never guaranteed, and the value of your pension could go down as well as up. Tax treatments depend on your individual circumstances (and could change in the future).
Summary
An ethical personal pension could be a good way to ensure that building the future you want doesn’t come at the expense of your values.
Whether you opt for the DIY approach or go with a provider, there are plenty of options to get the best out of your retirement fund in an ethical way.
How to open an ethical SIPP
Setting up an ethical SIPP is simpler than you might think. With Wealthify, for example, you:
- Choose your investment style, from Cautious to Adventurous.
- Pick our Ethical Plan option.
- We then build your Ethical SIPP, optimising your pension pot along the way.
To make sure investing is right for you, you’ll also need to take a suitability quiz.
We care about you having the retirement you want — and look forward to helping you achieve just that.
With investing, your capital is at risk. Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
