Pensions are neither the most fascinating nor accessible topic. Most people would rather visit their most obnoxious relative than spend much time thinking about them. There’s finding the money in the first place, dealing with inflexible companies who can’t give you the right information, trying to decipher impenetrable statements that no-one understands. And that’s if you can get your head round the rules to begin with. Improvements are happening, though. Technology and improved transparency are forcing a stuffy industry to re-invent itself and the choices available to anyone with £50 a month or more to set aside for retirement are gradually improving.
If you’re thinking that you should really do something, but are unsure about where to start, we would consider a SIPP – a self-invested personal pension. These pension products typically offer online access, transparent charges, a choice on where you can invest your pension money, and regular statements you might actually understand! You can set one up with a computer, a debit card and 15 minutes to spare. (Uou can learn more about private pensions here)
So how should I choose which one suits me?
Here are three key questions to ask yourself when it comes to selecting the right one for you:
1) Charges – what are you paying? You will typically pay a fee for the pension product itself, and then a fee for the investments you choose to put into this. These days, all-in costs of a SIPP for DIY investors should be no more than 1.3%. That includes pension administration, reports, support and investments.
2) Ask yourself how involved you want to be in picking the investments. If you’d rather watch paint dry than follow the stock market, opt for a pension option which involves a ‘ready-made’ portfolio. We have suggested some options below.
3) What are your timeframes? If you’re in your 30s or 40s, you’re in for the long-haul so don’t be afraid to go for a decent chunk in shares. Sitting in cash for 20 years is pretty pointless. Wisdom used to be that in your late 50s and 60s you should dial down the shares and increase bonds and cash. But we’re living longer these days and interest rates are at historic lows, so the old rules of thumb may not apply.
Here are 5 different options which will suit a variety of savers with differing levels of confidence:
A low-cost ‘ready-made’ pension
I suggest AJ Bell Youinvest, which won Best Online Pension Provider AND Best Online Investing Platform at the Consumer Investment Awards in June. You may recognise it from the telly. This Manchester based firm, well-recognised by financial advisers as a pensions expert, has a good culture and ethos. It’s not the slickest online experience, but the charges are very competitive.
It recently launched its own range of portfolios, which blend a range of passive or index-tracking funds. Investors can choose one of five options to put into their SIPP, depending on whether you want something cautious, or a little racier.
Fees will be 0.5% a year for the in-house passive funds. This is a special introductory rate that expires in January 2019 after which you’ll have to pay another standard 0.25% administration fee on top. Using a £50,000 pension sum as an example, that’s £250 a year in fees before 2019, increasing to £375 a year thereafter.
A newer firm with a simple digital approach
Nutmeg is a so-called ‘robo adviser’ (and one of our Best Buys) that aims to do the hard work of finding the right investment for you. You answer the straightforward set-up questions and you will be allocated to the portfolio (or bundle of investments) that the group’s behind-the-scenes elves think is suitable for your needs. This is a safe and easy path for people who want to ‘set and forget’ their pension savings.
Fees for a £50,000 pension lump sum are between 0.75%, with the investment fund costs on top (around 0.3%). That’s £525 a year for a £50,000 pension.
Aviva will suit more cautious people who value the comfort of a large, household name. It’s an online pension service which offers a range of choices catering for the less confident investor – choose from one of 4 ready-made pension funds – to a more confident saver who wants a much broader range of investment funds. The website needs improvement but is fairly straightforward to navigate.
Fees are 0.40% for the pension administration and 0.35% for one of their ‘ready-made’ growth funds – so a total cost of 0.75% for the lot. That’s £375 a year to manage your £50,000 pension lump sum. Costs will increase if you select from the broader range of funds.
Control for the more curious investor
If you actually want to choose your funds as well as some shares or investment trusts, Hargreaves Lansdown is a good service. It’s one of our Best Buys and it won Best Communication in Pensions at the Awards. It’s not the cheapest, but the people on the phones know their stuff and can help you. There are also in-house blended portfolios for those who want a ready-made option. It’s a decent option for engaged investors who just like things to work properly. It suits those comfortable navigating the world of investments and happy to decide what to put into their pensions savings account. If not, it may take you back to algebra class.
Administration fees for a £50,000 pension are 0.45%. You also need to factor in the cost of funds on top of this. You can build your own portfolio of funds which will add about 0.75% a year to the mix, or buy a lower-cost ‘ready-made’ fund like one of the Vanguard LifeStrategy range at 0.22%.
To choose and trade funds, really engaging with markets and making active selections, would cost a total of circa 1.2% a year, that’s £600 a year all-in on a £50,000 pension lump sum. If you use Hargreaves Lansdown’s pension but put the lower-cost Vanguard funds into it, for example, the costs will be nearer 0.67% a year, or £335 a year in our example.
The Exotic Expert
James Hay is worth a look for bigger portfolios and complex investments. Normally used by financial advisers, these guys are SIPP experts. Don’t expect online frills or hand-holding but it’s low-cost for larger portfolios and super flexible. If you are keen on a SIPP, know your ETFs from your OEICs and have a commercial property to add to the mix – dive in!
Fees are a low 0.25% for pension administration (though there’s an extra annual fee of £179 for portfolios of less than £200,000). There are some extra charges based on activity on the account and you also need to factor in the underlying investments. If you include commercial property, for example, it will carry separate fees.
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