The Monzo Pension has launched more softly than a marshmallow rocket lofted on a cotton wool plume.
And so far Monzo’s new offering looks strangely unambitious and feature-free, while simultaneously being quite innovative with its focus on solving customer problems such as: “How on Earth do I get a grip on my pensions without knowing much about pensions?”
Dive in for our thoughts on the Monzo Pension, how it works, and – crucially – how its key features stack up against comparable products on the market.
How does the Monzo Pension work?
Unlike any other pension scheme we know about, the Monzo Pension doesn’t want your money. At least not the new money you may be paying into a workplace pension or SIPP every month.
For now at least, Monzo’s pension is aimed squarely at sweeping up the trail of old pensions that many of us leave behind as we move from employer to employer.
It’s not easy to remember everyone you worked for. (Sometimes it’s preferable to forget.) One or two changes of address later and your annual statement from the pension providers of WeLikeEmYoung&Cheap PLC disappears into the void, never to be seen or thought of again.
Which is exactly how millions of people in the UK get detached from the Infinity Stones of pension power scattered around their own personal cinematic universe.
Monzo’s innovation is to offer itself as the superhero that will reunite these pension shards for you.
Actually, this isn’t really a difficult quest. Indeed Monzo outsources the task to its pension tracing partner, Raindrop.
Other pension providers use Raindrop too. You just need to tell the pension detectives who you worked for and when, while ponying up your National Insurance number.
Yet tracking down old pension pots is one of those things that’s hard to get around to if you have a life. (Note to self: get a life.)
So kudos to Monzo for nudging its customers into action.
What investments does the Monzo Pension offer?
Once your cash ker-chings into your new Monzo SIPP account it will be funnelled directly into your choice of investment fund.
And you can have any investment fund you like so long as it’s BlackRock.
Specifically a BlackRock LifePath Target Date Fund.
Is that it? I have a choice of… one fund?
Yep.
Monzo is big on keeping it simple.
Still, if it’s only going to offer one fund then Monzo has made a pretty good decision:
- BlackRock is a leading global fund provider. We’re completely happy to use its products ourselves.
- A Target Date fund is a very sensible, hands-off, multi-asset fund that’s ideal for anyone who is investing for their retirement.
There are actually nine Target Date funds – but they vary only as much as trains following the same route do. The difference lies in the time they leave the station, not in their quality of service or final destination.
The relevance of each fund is signified by its target year. For example, the BlackRock LifePath Target Date Fund 2055 is intended for people who want to retire sometime in 2053 to 2057.
Want to retire in 2052? Then it’s the BlackRock LifePath Target Date Fund 2050 for you.
Monzo simply drops your cash into the Target Date Fund that’s closest to the date you wish to retire.
How Target Date funds work
Target Date funds are designed to automate most of the investing decisions you have to make en route to retirement.
You get a diversified portfolio as standard. But your mix of equities and bonds shifts as you approach your target / retirement date.
At the beginning of the journey you’re likely to be hurtling along: pedal to the metal in a portfolio dominated by high-risk, (hopefully) high-reward equities.
By journey’s end though, your Target Date fund is easing off the gas like a fully-autonomous vehicle. As you glide into retirement, the fund will be mostly invested in low-ish risk, low-ish reward bonds.
How a Target Date fund derisks its assets over time. Source: BlackRock.
Essentially, a Target Date Fund prioritises wealth building when you’re decades away from retirement. It then gradually transitions to preserving what you’ve got, the closer you come to needing the money.
This is an orthodox and perfectly respectable retirement path designed to guard against an untimely stock market crash wrecking your plans.
However the Target Date approach is not guaranteed to work – because nothing is.
Target date profile
One weakness of Target Date funds, in our view, is that they’re light on inflation-hedging assets.
A greater concern though is psychological.
Automation creates the impression that you can take your hands off the wheel completely and everything will be okay.
In reality, you still need to periodically check your investment progress and decide whether you’re setting enough aside to support the retirement you want.
With that said, we’re still big fans of target date funds precisely because they simplify the pension-saving process for people who don’t want to handle the intricacies themselves.
Moreover, there’s no evidence that you’ll do any worse for ceding control versus adopting a flashier strategy.
Keep it simple, soldier
Don’t fall for the spiel that a simple investing approach won’t cut it.
The investing arena is a cesspit of FOMO. Like Instagram, investment propaganda is flooded with snapshots of people doing spectacularly well. Or rather people who look like they are doing well – possibly because they or their paymasters have something to sell.
A Target Date fund is the investing equivalent of someone the Instagram algorithm would never promote. An unassuming person you wouldn’t look twice at. Someone who isn’t perfect and has their ups and downs. But someone who nonetheless leads a good life because they focus on what truly matters.
They’re balanced and content and don’t fret about those with a better story to tell.
Are the Lifepath Target Date funds ethical?
You can check out the Lifepath Target Date funds page for yourself. It’s a masterwork of fluffy corporate accessibility unburdened by details.
There’s much talk about ‘considering’ sustainability but no firm commitment. The other key documents similarly neglect to make specific ethical promises.
That said, many of the investments held by the fund are labelled ESG-friendly.
‘Environmental, Social, and Governance’ is the supposedly ethical trifecta of buzzwords touted by financial services nowadays.
In theory the badge indicates your investment is being measured against some kind of ethical standard.
The trouble is working out what that actually means.
You should not assume that an ESG designation means your investments are aligned to your own values.
And don’t presume that your ESG investment incentivises companies to stop manufacturing arms, or to cease polluting the environment, or to refrain from exploiting their workforces.
In short, if you’re serious about ethical investing then the ESG label isn’t enough. You’d need drill into the detail and find out what your fund is investing in and whether that allows your conscience to rest easy.
Another way of putting this: there are no easy answers.
How much does the Monzo Pension cost?
You’ll pay annual investment fees of 0.45% to Monzo and an additional 0.18% to BlackRock.
If you’re a Monzo Plus, Premium, Perks, or Max customer then Monzo only takes 0.35%.
In pounds and pence those fees mean:
- For every £100 your investment is worth, BlackRock snaffles 18p and Monzo 45p.
Even when your pension pot reaches £10,000, BlackRock would still only take £14 and Monzo £45 per year.
That sounds like buttons and indeed BlackRock’s charge is very competitive versus equivalent products.
But Monzo becomes a very expensive platform if your pension sits north of £50,000.
In fact, when your pension balance reaches £100,000 Monzo will be charging you £450 per year, based on the fee schedule that’s been laid out at launch.
In contrast you can easily find pension providers who will bill you only around £200 for a SIPP that size. Go have a look at our broker comparison table.
Fast-forward a few decades and, with a fair wind, you could plausibly end up with £1 million or more in pension wealth.
Monzo would deduct £4,500 a year for that. Whereas a cheaper fixed-fee pension provider would still only tap you for £200.
Ballers beware
Monzo’s charges are fine if you’re starting out and you want everything in one place alongside your other Monzo services.
But you’ll pay through the nose for the Monzo Pension privilege if (/when) you’ve socked away some serious wealth.
Remember that high costs rob you of investment performance, leeching away pounds that should instead be compounding on your behalf.
Imagine two ghost cars driven by different versions of your future self. One carries too much weight and loses a second per lap, then two seconds, then three, then… you get the picture.
Are my investments safe with Monzo Pension?
Monzo’s Pension scheme is covered by the UK Financial Conduct Authority’s Financial Services Compensation Scheme (FSCS).
The scheme is designed to pay up to £85,000 per person if your FCA authorised investment platform cannot meet its financial obligations to you.
£85,000 is the maximum compensation you can claim for both your Monzo Pension and your Monzo Investments accounts. You aren’t entitled to £85,000 per account.
The same limit applies if BlackRock collapsed. Again £85,000 is the maximum amount you can claim for all your BlackRock investments.
Read up on the rules if you’re particularly concerned about FSCS investment protection.
And do note that the scheme doesn’t cover you if your investments fall in value.
Anything else I need to know about the Monzo Pension?
Although you can’t contribute new money to your Monzo Pension yet, Monzo is planning to switch on this fundamentally basic feature sometime.
Meanwhile, if you want to retire on your Monzo Pension then the options are currently poor. You’d either have to:
- Buy an annuity with the bulk of it
- Or take the whole amount as a lump sum – potentially exposing yourself to a large tax hit
The most popular and flexible retirement option – pension drawdown – is not available.
Perhaps drawdown will be enabled in the future. Or maybe there’s no rush because the majority of Monzo’s customer base is far from retirement.
Either way, it’s only a minor inconvenience because you can always transfer your pension to another provider later to access a full range of retirement options.
Happily, Monzo does not charge exit fees if you switch.
Is pension consolidation worth doing?
Not intrinsically. Merging your pensions doesn’t make them worth any more.
There’s no economy of scale you’re capitalising upon, it doesn’t mean they’ll be better managed, and the whole is not greater than the sum of its parts.
Consolidation is good if:
- Gathering all your pensions together in one place makes things simpler. Paperwork hassle is slashed and you can see how you’re doing at a glance.
- Consolidation makes sense if your new provider is more cost-effective or offers benefits you weren’t getting elsewhere.
- That’s about it.
But consolidation isn’t so good if:
- Your old scheme offers benefits that won’t be honoured by your new provider. Double-check before moving any pension. Ask your old administrator if your pension comes with safeguarded benefits.
- Your new provider goes bust and your account exceeds the FSCS compensation limit.
- Your new provider goes bust, you’re retired, but you can’t draw an income until the whole mess is sorted out which takes over a year. (The Monevator house view is that all retirees should diversify across at least two pension platforms to avoid this scenario. It’s very rare but it happens.)
- Your new provider is more expensive or offers worse investing options than your old provider.
Finally, as Monzo to its credit points out: you should keep paying into any workplace pension you can access, at least up to the limit of the employer contribution.
You can’t beat free money!
A capital idea
As weird as it is that you can’t pay new money into the Monzo Pension (yet), we still think Monzo’s entry into the market is a good thing.
Putting the emphasis on rounding-up old pensions is a truly innovative move that will help a lot of people.
Moreover, the sheer lack of fund choice is incredibly daring in an era where choice is fetishised.
Choice overload is a massive problem in investing. So it is wonderful to see a provider who understands its customers well enough to say: “Do you know what? This will do ya.”
And for many potential users we don’t disagree.
Take it steady,
The Accumulator
Probably a good thing for Gen Zers and late starting Millennials as they flip between early jobs accumulating small amounts in workplace pensions. Another easy to use pension consolidator is probably welcome (how do costs compare to the likes of Nutmeg and PensionBee?).
But well noted it’s the % costs that get you once significantly accumulating.
“As you glide into retirement, the fund will be mostly invested in low-ish risk, low-ish reward bonds.”
Useful if you want to purchase an annuity, less so if you want to draw down for another 30 years…
It’s basically lifestyling all over again.
Thank you for the review @TA.
I’m wondering what a marshmallow rocket lofted on cotton wool would actually be like, but I imagine that it would taste great 🙂
Like the ease of finding lost pension pots here.
From their fact sheet, here’s the current asset allocation breakdown for the BlackRock LifePath Target Date 2050 Fund:
Equities 91.6%
Fixed Income 8.2%
Cash 0.2%
And more specifically:
•BlackRock Russell 1000 Index Fund: 57.02%
•iShares MSCI Total International Stock ETF: 30.86%
•iShares Developed Real Estate: 4.33%
•BlackRock Small Capitalisation Index Fund: 3.48%
•iShares U.S. Long Credit Bond Index Fund: 2.91%
• Other 1.4%
Not sure though if this is the US only version, and if the UK will differ, and those % are dynamic of course; but its good to see that it’s not just Large Caps and Intermediate Bonds.
As you say @TA, some inflation linked assets like Index Linked Gilts or TIPS (perhaps with commodities and gold) would also be good.
IMO 0.45% p.a. is quite a lot though, so as noted in the review, perhaps more one for smaller pots/early days of investing.
There’s a lot of corporate bonds mixed in with the govies so by the time you reach retirement it’s got more oomph than implied by the 40/60 topline asset allocation.
The high price indicates to me that Monzo Pension is aimed at users who are prepared to pay a premium to keep everything in one app, and aren’t shopping around particularly hard.
@ DH – That looks like the US one. The final destination fund is about 15% linkers. Alternatives are just a few per cent but don’t show up in the holdings:
https://www.blackrock.com/uk/individual/products/333662/blackrock-lifepath-retirement-fund
I still don’t quite understand why compensations are so low in the UK. US offers $250k.
Also it would be good if government could guarantee full pension amount from collapse of the broker.
We all know they suppose to keep their books separate but that would make one less thing to worry about.
Normally I am not very pro standardisation, but really by this point the government should just force all defined contribution scheme pensions to have an agreed lifestyle type fund as the default fund with agreed portfolio proportions or within very tight boundaries, and an agreed default platform/management fee, and pensions with standard default options available at the end. This should be possible for all new pensions and means pension transfers could also be standardised and move with the employees as they move. It might be anti-choice, but it’s already happening except every business and employer is making slightly different choices on the make up of default funds, which just confuses the uninterested people even more.
Yeah, it becomes messy when folk don’t want the default options, and the current paperwork and effort of bringing pensions together would then be required, but the people fiddling with pension construction already are the ones likely to be on top of their pensions, so the effort involved for them to bring together non default investments is already being undertaken by those individuals already – we don’t need to worry about the interested pension savers.
Or… the government and regulators could start slapping huge fines on the companies holding back the pension dashboard. Lost pensions would not be a thing if the pension dashboards were up and running. How long have we been waiting on this now? I find it amusing that banks and financial services can rapidly deploy interesting and new products and services but as soon as it comes to something standardised or regulated that it gets held up for years and eventually gets deployed with reduced functionality and never quite works as initially envisaged. This is basically a few sets of data standards and a secure dashboarding tool to present the data.
In theory, this service isn’t bad, it is just designed for people who want to use minimal thought and effort to get pensions together. I would be arguing that for those who really have no interest in managing the pension assets, that a standard default single lifestyling pot that follows you from employer to employer would be a more appropriate product than this. The main point to take away from this being a product launch in 2024 is it demonstrates how far behind the pension tools and understanding of such are to many people. It is 2024, this should not even be a noteworthy product/tool, but here we are.
@ Ramzez – I’d certainly prefer a US scale backstop. Perhaps it’s a product of our smaller economy relative to national pension wealth? Perhaps it’s completely arbitrary. Weirdly in Europe they’re only covered up to €20,000. Though I think broker insurance is more common in Europe as a result.
Did you see that the Pension Protection Fund has accidentally become a source of significant State financial muscle? Distressed defined benefit pension schemes are rescued by the PPF and now it successfully manages a large wedge of pension wealth and generates a healthy surplus.
@ Random Coder – I helped a friend recently with their workplace pension scheme. A decent range of target date funds were available but competing for attention against an absolute riot of alternatives. It was all incredibly badly explained. My friend didn’t have a clue what to do.
I do agree that it would be better to have a standardised approach that people could trust and which benefitted from economies of scale. As I understand it, this is what the Dutch do. Ironically, it also seems they fret about whether their approach is too restrictive and could do with a shot of UK style choice and competition.
@TA:
Re: “Did you see that the Pension Protection Fund has accidentally become a source of significant State financial muscle? Distressed defined benefit pension schemes are rescued by the PPF and now it successfully manages a large wedge of pension wealth and generates a healthy surplus.”
This was always a possibility, so not IMO an accident at all. Primarily, this has arisen because the PPF pays (in some cases severely) reduced benefits; although a court ruling has confirmed that they should not pay less than 50%. The sad thing about the DWP review is I could not see any mention of returning any of the surplus to the PPF members by improving their benefits. The only “refund” I saw being mentioned is to reduce the levy employers pay.
In the event that the PPF were to become distressed, it is not under-written in law and could decide to further reduce the benefits it pays out. Sounds a bit like heads PPF wins, tails PPF wins! To quote Michael Caine “not a lot of people know that”!
@randomcoder. Please not even less choice. ISAs and pensions are already incredibly restrictive. Let’s not allow the govt to define what should and should not be held in a PRIVATE pension. The govt can define the basic parameters (allowances, caps, tax relief) but the actual investment should be none of their business. If the govt starts defining our investment options, expect quickly to be forced into investing in British companies and bonds.
You also say “we don’t need to worry about the interested pension savers.” I think that’s a bit like saying “we don’t need to worry about the smart children at school”. Maximizing choice and flexibility allows those who want to make the effort to outperform those who do not. Equal opportunity yes, equal outcomes no. In democracies, we allow people to be stupid by design. Choosing shitty investments is a democratic choice. Same as buying stuff they cannot afford on credit at 28% APR. Or denying climate change while never having heard of the 2nd law of thermodyamics. Or how most people vote without even reading manifestos.
@Random Coder @ZXSpectrum48K — Interesting points on both sides.
I think this circle could be squared with a big national private pension scheme (like the Dutch or whatever) that is basically a Vanguard LifeStrategy (or Blackrock or whatnot) life-styled as per this Monzo offering for target retirement age, but with entitlement to an opt-out.
The default scheme would be simple, cheap, and benefit from extraordinary economies of scale. It’d beat 90% of the alternatives.
Opting to default into a SIPP could always be available though, with employer contributions simply passed through at source.
If someone chose to do that then the world would be their oyster.
The likes of me, @ZXSpectrum48K, and many other Monevator readers would no doubt opt-out on day one!
But most wouldn’t, and it’d leave them in a simple and very low-cost and credible set-up to save for their retirement needs.
I absolutely take the point about target date/lifestyled funds being anchored in a past world of significant annuities taken at retirement date. But I think the “industry”/IFAs etc have not really got up to speed with the reality that modern holders of DC funds/SIPPs face – that is possibly 30+ years of retirement where they still have to beat inflation and make their own decisions on “income”.
I can absolutely see why SORR means it is very hard for a professional to argue that age is not the important number it is time invested and that holding a course is far more likely to see reasonable wealth and living standards in retirement than immediately trying to go entirely risk off immediately. Of course it isn’t binary and thus as I grapple with it I’ve been trying to build more buffers of “unproductive” cash, which isn’t that hard when you can still access 2 year rates of 4-5%.
@ ZX – I think there’s a difference between people who buy magic beans and people who are bamboozled by marketing literature and design architecture masquerading as help. The equivalent of the supermarket that puts the cheapest brand on the bottom shelf and doesn’t bother to restock it very often.
People’s time and energy is in limited supply while investing itself can be incredibly scary for some and counter-intuitive for most.
So while I agree with you that choice and competition shouldn’t be throttled, and you should be as free to do as you wish, most people would likely benefit from something like the BBC of pension funds as sketched by TI above.
@zx
Yeah, the only choices I am suggesting are taken away really are the nature of the default funds for those not interested or caring enough to change, and how those pensions move with the employee (I am suggesting if the default funds were standardised they could then be moved with the uninterested employee so they don’t end up with multiple small pensions).
Basically I was saying the type of service this blog posts details could be done naturally for those not interested enough by bringing the default pension along into the next employers default pension pot, which would work and be fairly safe/uneventful as long as the fund make up was similar enough. I would guess those in default funds either don’t know the nature of the default funds or at least trust that it’s a sensible fund, which it should be for the average person (whatever that means I realise…)
I agree, for people who are interested and know what they are doing, let them do what they want. If someone has picked custom funds and such from one pension scheme, when they move to a new employer I am assuming they would sort their situation appropriately as they already are interested enough and motivated, hence the not worrying about interested pension savers comment.
Having numerous small defined contribution pension pots in default funds is a situation the pension industry could readily resolve if it wanted to and it could be done only for cases where the default funds were being used.
I hadn’t thought about this before but I can see there is a case for ensuring a sensible and portable “easy option” for those who have not (yet) engaged with the importance of pensions. It could be a single default scheme, but that would create an effective monopoly that is difficult to change and it would work just as well to have an approved list of funds which meet the “easy option” specification and which all schemes are required to offer.
There is the question of whether target date funds are really ideal in a world where rather few buy annuities, but assuming those going for the easy option only start to engage with their pension pot at or close to retirement it makes sense to minimise volatility at that point.
One question is whether investing for retirement would be better organised as a national utility or left to the private market as it currently is.
Given the state of the pension market I’m inclined to give the public utility option a shake.
@TA (#15):
Not sure what evidence you are relying on to imply a public utility option would be any better? However, a practical way to test this out and quickly gather some evidence would be as follows:
a) at a given date, all* public sector pensions (inc MP’s) cease to be defined benefit in nature; and
b) are replaced with less generous (possibly non-inflation linked**) contributory DC-type scheme(s) that are administered by such a public utility
Seems fair to me if money is that tight and a pretty reasonable experiment too. After all “we are all in this together”, or was that some other lots slogan!
*with a possible exclusion for pensions already in payment, but with capped indexation of these as a minimum;
**to be sold as an incentive because as things stand these guys seem to be isolated from the effects of inflation
@Al Cam, I suspect previous governments have considered something like your suggestion (i.e. turning public sector pensions into funded schemes, doesn’t actually matter whether DC or DB) and spotted the huge downside. At the moment the pension contributions from people in work largely fund the pensions in payment*. If the pension contributions were diverted into new funds, then the pensions in payment would have to be paid in their entirety as government expenditure, with the annual cost only slowly decreasing year on year for some 40 years.
[*I assume contributions fall short of pensions paid out and government pays the difference; while public sector schemes have contributions high enough for a good funded scheme, those contributions lack the benefit of compound interest from sitting in fund investments].
NEST?
Unless Monzo is meaningfully cheaper or better performance ( to be proved), is someone looking for a simple, portable pension better off with NEST ?
Slighty more choice too, although still simple. Intended to address several of the issues mentioned- size, gov approved, default for many businesses, esp small employers etc.
@JB (#17):
Interesting, but …
The move away from DB to DC is essential in my mind to break the ever growing liabilities of the state (ie the tax payers!). My fag-packet calcs seem to suggest the contributions short-fall you mention is ever growing. Time to enter the real world IMO!
Re the DB elements: you seem to assume these pensions must be paid in full, why, this does not apply in the private sector? PPF scale cut backs should apply to all, not just DB’s held in the private sector.
Seems unlikely anything along this lines will happen. However, if actions like taking a handful of hundreds from little old ladies to pay above inflation payrises to public sector workers continue, there could be trouble ahead. Especially if/when the public wake up and realise where there taxes go!
@Al Cam
Fully agree public sector and MPs should move to DC. I would move the latter to a NEST Pension. They should reap what they sow.
@Mark
NEST charges 1.8% on contributions plus the fund AMC makes this an expensive choice. They mentioned in the past moving the Retirement fund equity allocation to reflect that of the so-called Ethical fund. However, current asset allocation shows it still contains a healthy chunk of organic energy companies. Personally, I prefer global equity allocation to ideological allocation. If pension companies want to make fund decisions based on politics or attempt to interfere with the running of the companies in the fund (as it has done with Shell), then members should first get to vote on these issues.
It may be that investors seeking equity diversity will eventually need to part allocate to the Sharia fund, but last time I looked this was tech heavy – hence the whopping 120% 5-yr performance!