When you think about doing your bit for the environment, the last thing you probably think of is your pension. The truth is, the companies we invest our pensions into have a big impact on the world.
Pension investments 101
There are several different types of pension but let’s focus on the more common products, the workplace pension.
A workplace pension is a type of defined contribution (DC) pension which you and your employer pay into. To make your money grow, the pension provider will invest the contributions made by you and your employer.
The companies that pensions are invested in are usually large organisations listed on stock exchanges around the world. The more successful the company, the better the return on your investment which ultimately means a bigger pension pot.
In its most basic form, a pension is a long-term investment that brings you a measure of financial security when you retire. The bottom line is, for your pension to do well in the long-term, the investment must be sustainable.
Are pensions sustainable?
Around £1.5tn is invested in workplace pension schemes in the UK. All of this is monitored and the performance of the funds can be viewed by anyone at any time.
This transparency means fund managers are under pressure to deliver rapid growth on investments. The knock-on effect is companies also feel pressured to deliver immediate results for their shareholders.
And the result? The pressure to deliver short-term results leads to long-term priorities like the environment and societal issues taking a backseat.
What does all this mean?
This need for short-term results is not only detrimental to the environment, but it can also hurt your pension pot.
Aviva, one of the UK’s largest pension providers found that in the long-term, this way of operating can lead to weaker companies and lower profits. Those companies that make sustainable investments tend to produce better long-term results.
A 2017 report by Big Society Capital found that it’s not just the financial benefit of a sustainable pension investment that mattered to people.
The independent social investment institution found that nearly half (46%) of those surveyed felt it was important that their pension was invested in organisations that reflect their social and environmental views.
The environment was identified as one of the top areas for investment and nearly 40% said they would want their pension invested elsewhere if the investments didn’t match those values.
Unfortunately, the environment and sustainable investments don’t seem to be a priority for workplace pensions. Charity group, Share Action found that most of the £87bn that is paid into pensions per year is being invested in unsustainable organisations such as oil and gas companies.
So how can you generate a good retirement pot in a way that is beneficial for the environment? Taking control of your investments with a SIPP could be the way to go.
What is a SIPP?
A self-invested personal pension (SIPP) is another type of defined contribution (DC) pension. Just like any other pension, a SIPP holds your investment until it can be accessed from 55 onwards.
The main difference between a SIPP and other DC pensions is the flexibility you get with the investments. You could think of a SIPP as a DIY pension. You can choose where your money is invested and manage that investment independently.
This means you can invest your money into companies that share your values and at the same time look for a return on your investment.
SIPPs can be opened with investment brokers or fund supermarkets. They are often managed online through a portal but can be managed in other ways as well.
Why choose a SIPP?
Unlike traditional personal pensions, a SIPP doesn’t limit your investment options. What you can invest in will depend on the type of SIPP you go with but some of the common investments include:
– Stocks and shares
– Commercial property
– Offshore funds
– Investment trusts listed on any stock exchange
A SIPP also has the same tax benefits as other pension types. SIPPs qualify for anything up to 45% tax relief and a lump sum of up to 25% can be taken tax-free.
Another benefit is the simplicity they can provide. Many of us will work for different companies throughout our career and as a result, we build up savings in different pensions. A SIPP can be an effective way of bringing them all together in one place.
Things to be aware of
As with any investment, they can go up and down in value. Remember, this is your pension and future nest egg you are investing so you should only consider a SIPP if you have investment experience. It’s always worth speaking to an independent financial advisor before making any decision on where to invest your money.
You may lose out on benefits associated with old pensions if you choose to transfer them to a SIPP. It’s important to consider what benefits you might be giving up before transferring them into a SIPP.
SIPPs are not a one size fits all product. There are two main types of SIPP to choose from, a full SIPP and a low-cost SIPP.
Full SIPPs offer the widest choice of investment but the fees are much higher, making them more suitable for people with large pension funds. A low-cost SIPP has lower fees but also fewer investment options. They are normally ‘execution only’ which means no advice on investments is offered by the firm.
Expats should be aware that unlike a QROPS, a SIPP is held in the UK and can’t be transferred offshore.
Remember, a SIPP is not for everyone and it just one option for those who want more control over their investment. If investments are not your thing but you like the flexibility that a SIPP gives you, our experts are on hand to make sure you make the most of your money.
If you would like to speak with someone about investing or to find out what other options are available, you can contact us using the form below.