The Monzo Pension has launched more softly than a marshmallow rocket lofted on a cotton wool plume.
And so far Monzo’s new offering [1] 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 [2].
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 [3].
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 [4] is a very sensible, hands-off, multi-asset fund [5] 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 [6] portfolio as standard. But your mix of equities and bonds [7] 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.
[8]
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 [9] 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 [10] 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 [11] 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 [12] 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 [13] 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 [14] 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 [15]-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 [16].
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 [17] 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 [18] by the UK Financial Conduct Authority’s Financial Services Compensation Scheme [19] (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 [20] 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 [21].
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 [22] – 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 [23] 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 [24].
- 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 [25] 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