Pension Power: FAQ
This is a worry that we hear from a lot of you. There is increasing evidence to suggest that you are not going to lose money by investing your money responsibly. In fact, it may actually be the most sensible thing to do. NEST for example – one of the biggest UK pension providers – aren’t going to invest in tobacco anymore because they think it is an unsustainable industry that isn’t going to make money in the long-term. Check out Good With Money’s Good Guide to Pensions for comparisons of how ethical funds do against default funds across different providers. Their comparison of the performance of NEST’s funds over the past 5 years indicates that ethical funds hold their own financially.
It’s not unusual for ethical funds to invest in some companies you don’t think are that great. Sometimes this will be because they are trying to use their power as an owner of that company to change their practices. However, there are definitely examples of ethical funds where the definition of ethical given by the provider is inadequate. We understand that can be frustrating, and that’s why we’ve got other actions for you to take. If your ethical fund suits you more than your default fund, then switching can still be a good shorter-term first step, as long as you’re comfortable with the differences in risk and cost. Over the longer-term, talking about this in your workplace or signing our petition could make a big difference to the funds available to you. The more people who learn about the impact of pensions, and start taking action, the more those who design funds will have to listen.
Almost certainly. 45 million people in the UK are enrolled in a pension scheme. These provide retirement income on top of the state pension. Since the introduction of automatic enrolment in 2012 most people are now paying into a pension. As long as you’re over 22, earning over £10,000 a year, not yet at state pension age, and being employed by someone, you’ll be paying into a pension. You do have the option to opt-out. You can find out who your pension is with at this government website.
When you were enrolled in your scheme, you should have received a letter with instructions. If you can’t find this, speak to your employer (probably your HR department). You could also give your pension provider a call or send them an email. You can find out who your pension is with at this government website.
Your employer chooses which pension provider you are with. You can switch to pay into another provider by opting-out of your automatic-enrolment provider and paying into a personal pension or SIPP. However, you will almost certainly lose your employer’s contribution to your pension pot if you do so.
If you’re in a defined contribution (DC) pension scheme you’ll usually have the choice between 2 or more funds. If you’re in a defined benefit (DB or final salary) pension scheme you normally don’t. In this latter case there is just one fund that the pension provider manages which you go into. Use this flowchart from Good With Money’s Good Guide to Pensions to work out which you’re in.
Have a look at our take action page to find out how to switch.
If you’re unhappy with your fund but don’t have the option to immediately switch into a different one, then try some of our other actions, such as speaking about this in your workplace or signing our petition. These are longer-term ways of changing what your money is doing. The more of us that start demand better from the people who build funds, the better they’ll have to be.
Some pension providers offer a large number of funds (in the hundreds) which employers choose a select number from (normally around 8) that you then get to choose from. Other pension providers offer fewer funds, and you get the choice of all of these (between 5 and 10). It tends to be larger employers who choose the first option, because they’re more likely to have the time and money to choose funds. Examples of pension providers that offer a large number of funds include Aviva and Legal & General. Smaller employers usually go to pensions providers which offer fewer funds. Examples of these include NEST and The People’s Pension. Ask your HR or operations department to be certain.
If you’re self-employed you won’t be automatically enrolled into a pension scheme, you’ll have to register for a pension yourself. If you want to choose a responsible pension, then have a look at Good With Money’s Good Guide to Pensions.
Yes, there are a couple of ways to do so:
– Most pension providers provide a service where you can transfer your past pots over to your current one. You can should be able to find out how to do so for your provider on their website.
– Some providers such as PensionBee combine your old pension pots into one for you.
If you’ve ever been in a defined benefit scheme, it won’t be possible to combine this pot of money.
One of the main ways to tackle investment risk is to ‘diversify your portfolio’. This means buying lots of different financial products, so that you don’t have too many eggs in one basket should that investment fail. As responsible pensions won’t invest in certain companies, you may have fewer baskets. This means the risk to you is higher.
We’re not focussing on sending letters to pension funds at the moment. ClientEarth do have a letter you can send if you’d like to.
Yes. If your pension provider is NEST, their ethical fund is divested from fossil fuels. We think all pension providers should have this option.
We campaign on responsible investment, which is a toolkit of investment and engagement approaches that include divestment. We say that divestment is the right tactic when meaningful engagement with companies hasn’t had an impact. Fossil Free UK have a map of groups lobbying pension funds of groups lobbying pension funds to divest from fossil fuels which you can use to find a divestment campaign.
Pension providers can’t charge you more than 0.75 per cent of your pension pot per year to manage your default fund. To keep costs down they do what’s called ‘passive’ investment. Minimal research goes into finding out whether companies are doing good or bad, and next to no staff time is spent on engaging with companies. Because there is less work involved, this is cheaper. Doing lots of research on companies and practising meaningful engagement (called ‘active’ investment) requires more staff time and is more expensive. However, some pension providers are showing that responsible investment that doesn’t cost you lots of money is possible. NEST for example scored highly in our ranking of the biggest UK pension providers, doing well on both how they invest and how they engage.
Pension providers can use their power as owners of companies to carry out engagement – where they try and change the practices of companies they invest in. By asking AGM questions, and filing and voting on shareholder resolutions, they can push companies to align their business model to the goals of the Paris Agreement – a world with only 1.5 degrees of global heating. If companies refuse to engage or take action, then the pension provider should divest.
Your pension is only one piece of your personal finance puzzle. The other parts build the world around us too. These are your next steps once you’ve ticked off your pension.
Check your bank accounts
When you put money in a bank account it doesn’t just sit underground in their vault. Banks use this money to provide loans to businesses. These businesses do things in the world, some do good and some cause harm. Without funding from banks, many businesses and projects would struggle to operate.
Decisions about which businesses banks lend to are usually made on financial grounds. However, there are banks that won’t fund certain companies or industries. If this is important to you, you can choose to entrust your savings with them. Then you can feel secure knowing that your money isn’t being loaned out to fund a project or company you disagree with.
What can you do? You can research which ethical banks are out there and switch if you want to. Here are a couple of resources to help you do that:
- Positive Investment’s ‘BankSwitch’ This has information on what types of projects the main UK banks fund, as well as outlining how you can switch.
- The Good Shopping Guide’s ethical bank ranking.
- Good With Money’s rating of the 5 best ethical current accounts of 2019.
Check your investment accounts
Investment accounts such as ISAs work quite similarly to pensions. Your money goes into a fund which is used to buy lots of different financial products. There may or may not be ethical criteria that guide investment decisions. It could be that the money in your investment account is building a world you’re uncomfortable with.
What can you do? Start by searching the name of your ISA/investment provider plus ‘responsible investment policy’. Look out for information on investments (do they say they exclude or target investment at any companies or sectors?) and engagement (they might this stewardship). Then shop around for a good ethical investment.
Your pension has an impact on the world around you right now. But don’t forget it’s there for your retirement – to give you money to live on when you want to work less, or stop working altogether. Here are some useful links to find out more about saving for retirement:
- Retirement facts in plain English. How much you need. What choices you have. And what to expect. Have a read of Boring Money’s retirement guide.
- Concerned you’re not saving enough for an adequate retirement? You’ve probably got reason to be worried. Most people contribute 8% of their salary into their pension, but research says you should be contributing 12 per cent for an adequate retirement. Use Aviva’s Shape Your Future tool to see whether your pension pot matches up with the lifestyle you want to lead.
- Got any other questions on planning for retirement? Then get in touch with the Pensions Advisory Service.
Send us any more questions to firstname.lastname@example.org