If you want to take charge of your own pension savings, rather than simply hand your money to an insurance company, the conventional wisdom has been to start a self-invested personal pension, more commonly known as a SIPP.
These do-it-yourself pensions allow savers to choose where their money is invested, and offer far greater freedom. Rather than select from a narrow range of insurance company funds, a SIPP offers a panoply of investments, including bank deposits, bonds, shares, pooled funds such as unit and investment trusts, open-ended investment companies (Oeics), exchange-traded funds (ETFs), commercial property, hedge funds, foreign currency and warrants.
But this simplistic definition ignores the sea change that has affected pensions in recent years. There are now a variety of SIPP products, including hybrid or “off-the-shelf” SIPPs (offered by insurers) and low-cost execution-only versions, which as the name suggests are cheaper but offer more limited investment options.
At the same time, new technology has enabled investors to run personal pensions via a “platform”, such as a fund supermarket, giving them access to a wide choice of investment funds – often at a fraction of the cost of a traditional SIPP.
Recent research certainly indicates that some SIPP holders aren’t making the most of their investment options, so they may be paying far more than they need for their pension wrapper.
According to Skandia, a platform provider, one in four SIPP customers has the vast majority of their pension (more than 90pc) in unit trusts and Oeics, while 70pc don’t invest in ETFs and almost half (45pc) do not use their SIPP to invest in equities directly.
Nick Dixon, Skandia’s marketing director, said many of these customers should review their pension options. “Since the introduction of SIPPs their popularity has grown significantly and they are sometimes positioned as the only pension worth having,” he said. “This is not in the best interests of the majority of people and there is a danger that many SIPP customers are in the wrong product.”
He said that in some cases customers could hold the same investments for less, via a platform-based personal pension.
The picture has been further complicated by so-called hybrid SIPPs, sold by insurance companies. These typically offer access to a wide range of funds, but many require customers also to invest in the company’s own managed funds.
In most cases these plans have lower charges than “full” SIPPs. But if the bulk of investors’ money remains in the insurer’s funds, customers may be paying more for the SIPP wrapper – compared with the company’s personal pensions – even though their money is primarily invested in the same basic funds.
Alasdair Buchanan of Scottish Life said: “Many customers are joining SIPPs when all they’ll use them for is investing in the insurer’s funds. You can do this with a personal pension at a greatly reduced cost.” Mr Buchanan said he believed that a gaggle of major providers had “lacked transparency for some time”, and this had led to advisers directing clients into the wrong plans.
“Standard Life, for example, runs a basic personal pension alongside its SIPP,” he said. “The two provide identical fund choices. But nearly all of Standard Life’s new customers have been going straight into its SIPP, and a huge percentage of them are only invested in insurers’ funds.” However, Standard Life said customers didn’t pay any extra to invest in such funds through a SIPP, but the latter offered greater flexibility, particularly when it came to taking an income in retirement.
The Financial Services Authority has previously investigated whether SIPPs were being sold with appropriate advice, and has cautioned some advisers against “churning” existing pensions into SIPPs to benefit from higher commission payments.
The SIPP market has grown at an exponential rate in recent years. They were launched by Nigel Lawson (below right), the then chancellor, in 1989. Today more than £100bn is invested in these products.
Deciding what type of pension you need is not easy. First, investors need to look at their investment strategy. If you want to diversify into a wide variety of assets, you need the flexibility of a full SIPP. Compare costs and options from the likes of Suffolk Life, A J Bell and Hornbuckle Mitchell.
If you intend primarily to hold investment funds, then a low-cost SIPP or platform-based pension may be a better option. Much will depend on whether you need advice, as many low-cost Sipps are “execution-only” products. But even here working out the most cost-effective solution is not easy, as companies operate very different charging structures.
Tom McPhail of Hargreaves Lansdown said: “Old-style high-charging SIPPs with fixed fees may not be suitable if your money is primarily in pooled funds.” But he said this was not the case with the newer low-cost SIPPs, such as the Vantage product offered by his own company.
“Not only are these cheaper than the platform pensions run by the likes of Skanida, but they also offer wider investment choices,” he said.
But charging structures vary, making it hard to compare products on a like-for-like basis. A number of providers don’t charge set-up fees or annual administration costs. These include Hargreaves Lansdown, Sippdeal, Bestinvest and Fidelity. Alliance Trust does not have a set-up fee, but charges £125 a year for administration.
Don’t assume that “no fee” means there are no costs involved at all. In most cases the annual charges levied on active funds are shared between the fund manager and the SIPP provider. And some providers will rebate a greater slice of this fee to the consumer. For example, those investing in Invesco Perpetual’s High Income fund through the Hargreaves Lansdown Sipp pay 1.5pc a year; the same fund held in an Ascentric pension account charges 0.75pc, while Cofunds’ pension account charges 1pc.
According to Informed Choice, the advisory firm, if you held a total of £100,000 in four funds and one ETF in a SIPP for a year and made one switch, you’d pay a total of £1,134 with a Hargreaves Lansdown SIPP but just £1,028 with an Ascentric pension account.
However, Hargreaves Lansdown pointed out there Ascentric would charge for a whole range of “extras” that are free with the HL Sipp service. These include a £50 charge to transfer each pension into the SIPP, plus a £12.50 switching charge when you buy and sell funds.
It’s also important to note that the “free” SIPP providers still need to charge for their services. So, although Hargreaves Lansdown doesn’t charge an annual fee for the majority of its funds, it does apply a charge if you hold investments – such as tracker funds – that don’t pay commission. This can be up to £2 a month.
The low-cost providers also have varying charges for direct shareholdings. Some charge a percentage fee, dependent on the size of your holdings, other charge a flat fee. Hargreaves Lansdown, for example, charges 0.5pc (capped at £200), Sippdeal charges £12.50 a quarter and Bestinvest charges £100 a year.
All this makes it nigh on impossible to identify the cheapest provider, as much will depend on the size of your portfolio, how many (and which) funds you hold, whether you hold shares and how frequently you switch your assets.
For more cautious investors it’s also worth checking the interest rates paid on cash holdings. These can vary hugely and can also make a difference to overall returns.
Source : The Telegraph
By Emma Simon