One reader wants to invest her pension pot in funds that are socially responsible, but should she put all her eggs in one basket?
I have £63,700 invested in workplace pensions from previous employers. Of this, £52,000 is in a group self-invested personal pension (Sipp) with Hargreaves Lansdown. I prefer to invest ethically, so have chosen the F&C Responsible UK Equity Income fund and the Kames Ethical Equity fund.
I also have £11,500 in an Aviva company pension plan through its ‘Mixed Investments Annuity Lifestyle Approach’ in the Mixed Investment (40%-85% shares fund).
Should I transfer the Aviva pension into the Sipp? Or should I keep them separate and put the Aviva money into an ethical fund?
Initial diagnosis
Having everything in one place will make everything simpler, but comparing charges can be tricky, according to Mark Stone, a chartered financial planner at wealth manager Whitechurch Securities Ltd.
“You need to ask both providers to send you full details of the charges applying specifically to your own policies so you can compare them on a like-for-like basis,” he says.
“The Aviva scheme may have in-built Guaranteed Annuity Rates, which may give you a much higher pension than you would get by buying one in the open market, or a protected tax-free cash sum, that is higher than you would get elsewhere,” he adds. “There may also be a penalty for moving the Aviva plan.”
Treatment plan
The Hargreaves Lansdown Sipp is attractive as it offers flexible drawdown, which allows you to take unlimited withdrawals from the pension, plus it has a wide choice of investment funds. It won Best Sipp for beginners at the Moneywise Pension Awards 2017.
Justin Modray, founder of Candid Financial Advice, says: “It’s on the pricey side, costing 0.45% a year versus rival Fidelity at 0.35%, but, based on the amount you have invested, it’s cost effective.”
The Aviva pension, meanwhile, is harder to appraise. “There are no standard charges for this type of pension. It depends on exactly which company pension you have and whether your old employer negotiated a discount,” he adds.
So check if the Aviva pension offers flexible drawdown in retirement, and if you’ll incur penalties by transferring.
“If it offers flexible drawdown and costs are similar to Hargreaves Lansdown, the only reason for transferring to Hargreaves Lansdown would be simplifying your pension by holding one account,” he adds.
Note that the Lifestyle fund in your Aviva pension will be inappropriate if you plan to use drawdown in retirement rather than buying an annuity.
“Lifestyle funds assume you’ll buy an annuity at retirement, hence why they gradually shift your fund in to bonds and cash as retirement approaches,” explains Mr Modray.
Diversified prescription
Jason Witcombe, director of Evolve Financial Planning, points out both funds in the Sipp are UK equity portfolios, so returns will be heavily dependent on the performance of shares in companies listed on the London Stock Market.
“Consider what justification there is for not having more international exposure – and maybe an element of diversification away from equities,” he says.
Both funds are actively managed and, therefore, more expensive than passively managed.
“The Vanguard SRI Global Stock fund is available via Hargreaves Lansdown and is 0.5% a year cheaper than your current funds,” he says.
This fund invests in larger companies in developed markets around the world that satisfy a screening process for socially responsible investing, which takes into consideration factors including corruption, the environment, human rights, labour, and weapons.
Note that the term ‘ethical’ covers a variety of funds, which are labelled as green, socially responsible or sustainable.
“They have different approaches, so it’s worth reading the fund factsheets and any supporting information to help decide which approach you prefer,” he adds.
With everything considered, Mr Witcombe believes a Sipp offers some attractive benefits. “There is the flexibility to reduce fund costs, better diversify, and make sure that the funds that you invest in meet your ethical criteria as closely as possible,” he says.
Mr Stone says your decision to transfer comes down to whether the most important consideration is choice or flexibility.
“You could argue you currently have the best of both worlds,” he adds.
Rob Griffin writes for The Independent, Sunday Telegraph and Daily Express.
Do you have a question for the Investment Doctor? Email editor@moneywise.co.uk
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