Considering ethics when investing has slowly been on the rise over the last couple of decades. However, even if it’s something you think about with your investment portfolio, you may not have factored in your pensions. As contributions are often deducted from your salary automatically, they can slip your mind.
Yet, whether you have one or multiple pensions, they’re likely to be one of the largest assets you have. After all, employee contributions typically span decades over your working life, coupled with employer contributions, tax relief and investment returns. As a result, if ethical investing is something you’re interested in, including your pension in decisions is worthwhile.
Put simply, ethical investing is about incorporating your personal views into how and where you invest. Much like ethical shopping means actively choosing some products and avoiding others for ethical reasons, it’s the same with investing, Whilst you might choose the fair trade fruit at the supermarket, for example, you’d choose the companies that pay a fair wage to invest in.
It’s about having a goal that goes beyond simply delivering returns on your money. For example, encouraging green energy innovation, fairer working practices across the global supply chain, or reducing environmental degradation. Some refer to ethical investing as having a double bottom line; the returns and the positive impact you hope it will encourage.
Ethical investing is often filled with jargon and you may have heard the practice of incorporating values into investing as sustainable, responsible or green investing; they all broadly mean the same thing. Ethical investing can then be broken down into three key issues, referred to collectively as ESG:
When it comes to pensions, incorporating ethics may mean switching to a different fund or actively selecting ethical investments if you have a SIPP (Self-Invested Personal Pension).
Research conducted by Invesco highlights a growing demand for pension products that reflect ESG principles in some way:
Whilst ethical investing does allow you to back companies that align with your values, there are drawbacks to consider.
First, ethics are highly subjective. Whilst your pension provider may offer an ethical fund to choose from, it might not align with your values. As a result, you may have to compromise.
Second, considering ethics is a growing trend among businesses, but you will be limiting investment opportunities. This may mean that returns are lower due to choosing ethical investments.
Finally, validating some claims companies make in their corporate social responsibility (CSR) reports can be difficult, as can measuring the positive impact of investments.
As demand for ethical investment continues to grow, it’s likely these issues will become smaller. However, they are worth considering if you’re interested in investing your pension ethically. Remember, your pension should provide you with an income throughout retirement. Other factors need to be considered alongside ethics too.
If you decide you want to invest your pension ethically, how you do so will depend on the type of pension you have.
If you’d like to discuss how your pension is invested and the income it’s projected to deliver at retirement, please contact us.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.