Traditionally, around 9 in 10 people saving into a pension have left their contributions in the default fund. However, a survey suggests that millions of workers are thinking about moving their pension into a “green” fund that considers how investment decisions affect the environment says David Brunning, Independent Financial Adviser at Pembroke Financial Services.
When you first start paying into a pension, your contributions, along with employer contributions and tax relief, will be invested through a default fund.
You will usually have several fund options to choose from. This will often include funds with various risk profiles and ones that consider environmental, social, and governance (ESG) factors, some of which may be labelled as “green”.
David said: “A green pension fund’s criteria will vary between providers, so the fund might exclude companies operating in the fossil fuel industry, avoid companies involved in deforestation, or invest in businesses leading the way in renewables.”
If you’re thinking about switching your pension, it’s important to understand how a green pension aims to have a positive effect on the environment, as well as the risk profile of the investments.
21 million pension holders would consider switching to a green pension
While some people are already making ESG criteria a part of their investment and pension decisions, research indicates that millions more people could make the switch in the future.
According to a This Is Money report, around 21 million out of 40.7 million pension holders would choose a green pension if their scheme made one available. 16%, the equivalent of 6.5 million people, said they plan to make the switch in the next 12 months.
David commented: “If the survey accurately reflects intentions, it suggests there could be a huge shift in the way people invest over the coming years.
“For many workers, a pension is one of their largest assets. As most employees are now automatically enrolled into a pension, it’s an asset that’s likely to grow.”
Figures from Make My Money Matter suggest there’s £2.7 trillion in UK pensions. The initiative says that around £1 trillion of UK pension assets is already in a scheme that has set robust net-zero targets in line with climate change goals. However, 70% of pension schemes have not set strong enough goals.
If demand from pension holders is strong, there could be a serious shift in how money is invested across the UK.
When it comes to reducing your carbon footprint, Make My Money Matter estimates that switching to a green pension is 21 times more effective than taking up a vegetarian diet, giving up flying, and switching energy providers.
3 steps to take if you’re considering switching to a green pension
1. Check your current pension provider
“If you’re thinking about switching your pension to make your investments green, your existing scheme is a good place to start,” David said.
“Many pension providers now offer investment funds that consider ESG issues in some way, including green and environmental policies. Staying with your current provider means you won’t lose any existing benefits you hold.”
It’s usually simple to switch funds. If you have an online account, you can often do it in just a few minutes. However, make sure you take some time to understand the potential effects of switching first.
2. Understand what “green” means
There’s not a standard definition for a green pension or a simple way to compare the different options available.
So, while you may find a green pension fund, you should look at the criteria the scheme uses. This can give you an insight into how your money would be invested if you switch.
If you have a clear idea about how you’d like your pension to be invested, in some cases, you may find that a fund doesn’t meet your criteria or that you need to compromise in some way.
3. Review the risk profile
Finally, you may want to make your pension more environmentally friendly but that doesn’t mean you should switch to any green fund. You also need to think about how the investments will fit into your wider goals and assets.
David added: “One key consideration is whether the fund is appropriate for your risk profile. All investments, including those held in your pension, carry some level of risk. This should reflect your goals and circumstances. If you’re not sure what your risk profile is, we can help.”
If you’d like to discuss making your pension, or other assets, green, please contact us. We’ll help you understand the different options and how they could fit into your financial plan.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.