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Monzo Pension: what’s on offer, is it any good?

by The Accumulator on July 30, 2024

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.

BlackRock Lifepath Target Date fund glidepath diagram

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

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Weekend reading: A capital idea or just crazy?

by The Investor on July 27, 2024

What caught my eye this week

I developed Covid on my long-awaited holiday at the end of June, its symptoms lingered for nearly four weeks, and I’m now a week into some kind of chesty-cough cold that smuggled itself in through the back door during the kerfuffle.

So maybe it was all the cough medicine and lack of sleep playing tricks with me… but wasn’t that Olympics opening ceremony in Paris last night completely bonkers?

Audacious, inexplicable, tedious, striking, cringe, and unhealthy for the rain-sodden elite athletes – and usually all at once. Probably the most French thing I’ve seen since Luc Besson’s The Fifth Element did Star Wars in haute couture.

(Well, not counting the date I had with a French girl in my early 20s who I met on a work trip who traveled from Paris to see me, greeted me with a compilation tape which turned out to be mainly women wailing against the sound of church bells, declared all the food at the trendy yet affordable restaurant I’d gingerly selected to be inedible, and who then watched me eat three courses over three untouched plates of her own food because no, it wasn’t ‘inedible’, and I wasn’t going to go without pudding.)

I have no investing angle on this to torture into shape. Life can’t be all cold rational numbers you know.

Just ask whoever did the accounts for last night’s bonkers extravaganza.

Taxing matters

One quick errata: we overlooked the revised rate of capital gains tax for higher-rate payers on property disposals in our update yesterday. It is now 24%, down from 28%, as our ever-alert readers spotted. Thank you!

Although as another reader wryly observed: who knows how long anything in the current regime will survive contact with Rachel Reeves, anyway?

Something in the tax and pension system will change with Labour’s Budget in the Autumn, that’s for sure.

However I wanted to update these articles ASAP on account of all the emails and comments I’m getting that referred to the old capital gains allowance.

Much more than, say, a year ago.

To me that points to more people contemplating evasive action – shooting first, and planning to read all those The Autumn Budget And Your Finances summaries later.

Which I’ve mixed feelings about.

I took a big tax hit in 2021 on disposing of a six-figure position that had more than ten-bagged for me – just about the last of my legacy unsheltered holdings.

I feared a capital gains tax hike that never came.

But then tech stocks crashed and I felt tentatively smug as the very same shares I sold would have halved in value.

I was right to be tentative though. The stock – which I never repurchased in anything like the same size – recently hit a magnificent all-time high.

The point is that absent a crystal ball, it’s impossible to know what exactly to do.

For example, you could sell a big position like I did to take the tax hit upfront and aim to use the proceeds to fuel your ISAs for a few years – but perhaps the annual ISA allowance will be cut.

Or one of a hundred other permutations.

This is why strategy always trumps tactics. Fill your ISAs and max out your pensions where possible then move to paying down your mortgage. If after all that you still have problems, maybe best to be grateful compared to poorer households still reeling from much higher prices and mortgage costs?

Well, be grateful but continue to hunt for an optimal solution I guess, but with a smile. Because the tax hit on investing returns is very real.

Have a great weekend!

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Optimising the All-Weather portfolio [Mavens]

For MAVENS and MOGULS by The Accumulator on July 23, 2024

The All-Weather portfolio is reputedly better than conventional portfolios at balancing our need to take investing risks while at the same time cushioning us from the worst of:

Recessions
Inflationary shocks
Terrifying stock market crashes

We tested these claims in our All-Weather portfolio explainer post. We concluded that the strategy really has delivered over the long-term, reaching back to the 1930s.

This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.

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Weekend reading: Pointless jobs, or missing the point?

by The Investor on July 20, 2024

What caught my eye this week.

You can passionately make the case for financial independence being hugely positive versus retiring early being a bit of wild goose chase – and I have. But if some unfortunate office drone has just been sent to the seldom-visited filing cabinets in the strange rooms behind security to spend a week hunting for all the paper-based invoices from O’Brien and Sons from the 1970s, well, good luck getting them to vote for the job.

Of course many jobs are rubbish. But from the earliest days of this blog I’ve argued they used to be even worse. All repetitive manual paperwork and calling Mr Blimp ‘Sir’ as he dressed you down for wearing the wrong kind of tie again.

Not to mention the love of coal mining and sweating in an iron foundry that middle-aged middle-class columnists love to champion – but would be dead doing themselves in a fortnight.

Somebody’s got to do it

There’s a big difference between a job being unsatisfying and the actual work being pointless or futile.

Yet a decent chunk of the Retire Early and Forever cohort of the FIRE scene1 believe that modern jobs are literally pointless – even to the organisation they’re working for.

They cite arcane tasks steeped in ritual but bereft of meaning, such as preparing a presentation for a senior manager that they suspect will never be read. And to be fair most of us can agree with them about all those pointless meetings.

Overall though, I believe most of these jobs have a function – at least in the private sector.

Sure there might be a bit of padded headcount here or some not-yet-optimised away employees there.

But even badly-run companies won’t survive for long carrying too much deadweight that’s doing nothing to keep the operation going.

Strike through

I saw this when I was managing my own small start-up. There were never enough hands for all the work to be done – much of it indeed annoying or trivial-seeming.

Some of those hired hands were a bit useless, I reluctantly concede. But not what we had them doing.

At least not from the myopic perspective of our company. Which is to say: nobody was curing cancer.

That is clearly a big issue for a lot of people. If pushed, they can see their work has a function. But they don’t see the point for humanity, I suppose.

The other issue is the typical cog doesn’t have a good view of the machine. Your useless role writing up user manuals that you believe nobody reads might be a lifesaver one day when your company’s minor malfunctioning gadget brings a giant operation to a halt. Not to mention it’s hard to sell stuff without operating instructions, even if most people ignore them. So they’re a function of sales and marketing.

Or just ask whoever presumably has done something wrong at Crowdstrike. I don’t know what exactly crippled half the world IT system’s following its software update yesterday. But I’ll bet it’s a trivial-seeming thing gone wrong.

Not some exciting security function that was dreamed up by the company’s brain trust and lovingly laboured-on like Michelangelo working over a ceiling. Rather, the version control or installation code or similar.

Boring stuff that gets no acclaim, and that nobody rushes out of university to get started on.

But which is quietly absolutely essential.

It’s a wonderful life

For more on all this, you can click over to Byrne Hobart’s devotional paean to the complexity of modern workplaces on Capital Gains this week.

In taking down a Bible of the Modern Work is Rubbish movement – the late David Graeber’s Bullshit Jobs – Hobart writes:

Graeber estimates that roughly half of all work fits his fake job categorization, which implies that the economy’s productive capacity is roughly twice the output we actually get. It would be a pretty big deal if this were true: we could have a lot more leisure, and a lot more stuff.

And there are people motivated to make this happen! The strongest single argument against Graeber’s book is: did anyone at Bain or McKinsey read it? What about KKR and Blackstone?

Did any owner of any business of any size read it and say: “What a sec! That’s right! Most jobs really are fake jobs designed to make rich people feel good about themselves. But what makes me feel good about myself is having more money, so I’m going to start firing people and keeping the money.”

The closest you can get is Elon Musk at Twitter, which did reveal that the service could keep running, and ship new features, with a lower headcount. But that happened at a company that was notoriously inefficient, for years, and one where it’s widely-agreed that they unnecessarily blew their lead in short-form many-to-many communications, and took too long to get into messaging.

If there’s one large-scale example of the thesis playing out, and the thesis holds that it’s describing a ubiquitous phenomenon, something doesn’t add up.

Hobart rightly concedes that many jobs aren’t fun to do and also that many people are in the wrong jobs for them, personally.

But as he concludes:

The world is full of mysterious economic phenomena. You should expect it to be!

A world where you can consider a random career or business for a few seconds and instantly identify a way to double its efficiency is a much weirder world than one where those mysteries tend to have satisfying answers.

It’s also a world whose sizable and growing aggregate wealth is a big mystery: if we’re wasting more and more of our time, shouldn’t we be getting poorer?

Go give it a read and see what you think.

Honestly, with all the dire warnings about the typical worker’s imminent replaceability by an AI drone, it’d be nice to think we were just giving each other things to do out of habit, ego, stupidity, or an obliviousness to the bottom line.

In an AI-powered world we could then continue to pay ourselves to – metaphorically – dig holes on a Monday only fill them up again by Friday.

But real-world capitalism is far too ruthless for that.

Have a great weekend.

[continue reading…]

Financial Independence Retire Early. [↩]

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