Alex is on the road to becoming a teacher, where she'll help kids grow into their best future selves. But what about Alex's future? With no pension yet, she's right at the start of her savings journey. But time is on her side if she starts now.
Confidence level: 4 out of 10
"This is because I've never thought about it properly until I turned the big 3-0. As soon as I graduated from university, I moved abroad to work and travel. I guess I forgot to think about some of those essential 'adult' things in your twenties. And my parents never talked to me about finances so it seems to be a bit of a taboo subject!
"Now that I'm living back in the UK and the cost of living has increased dramatically for me and the struggles of people living through the pandemic, I've started to think about the future. So I'm getting advice from blogs, financial columns, a few books specifically for women, plus the odd podcast."
My pension planning question...
"I am considering getting a SIPP but I am unsure about how much I should expect to pay yearly. I would rather have one that I do not have to manage, as I am a beginner. So apart from the annual admin charge, what other charges should I prepare for? For instance, how often are dealing charges paid?"
Wants to open her first pension
Wants to save around £100 a month
Answer by Tom Selby, AJ Bell Youinvest
Senior Analyst - Meet the experts
You are right to put costs front-and-centre when choosing a SIPP as even a small difference in the amount you pay can make a big difference over the course of decades.
Take for example someone who pays £1,200 a year – equivalent to £100 a month – into a SIPP. That would immediately be topped up to £1,500 by pension tax relief (and they could also reclaim extra relief from HMRC if they are a higher or additional-rate taxpayer).
If their fund enjoys 5% annual investment growth and they pay 1% in charges, after 30 years they could have a total pot worth around £87,000.
However, if they instead paid 0.5% in annual charges and enjoyed the same investment growth, after 30 years their fund could be worth £95,000.
To put it another way, by reducing annual charge by just 0.5 percentage points they could boost the value of their pension after 30 years by £8,000.
How much should I expect to pay in charges?
For most people the main charge components will be an administration charge paid to your SIPP provider – usually either a percentage of your assets or a flat fee – and a fee which goes to the firm managing your investments.
There may also be charges when you buy and sell investments, and when you come to take an income in retirement. These charges should be clearly set out by your provider and it is important you consider all of these together when deciding where to invest your hard-earned cash.
As you are a beginner and say you’d prefer not to manage your pension on a day-to-day basis, it might be worth doing some research into the different services offered by your SIPP provider, for example a ‘ready-made’ investment portfolio.
Lots of providers offer these types of solutions, with your money invested in a diversified selection of assets and the portfolio designed depending on your risk appetite.
How much you pay for your investments will depend in part on whether you choose an ‘active’ or ‘passive’ investment strategy.
An active fund manager will attempt to beat the market (and charge a higher fee for their services), while a passive manager will pick lower-cost investments that usually aim to track a particular index (such as the FTSE100).
How much you are willing to pay for these services is a personal choice, but you should be able to construct a well-diversified portfolio based around passive investments for around 0.6% (inclusive of the admin fee). If you are paying more than this it is worth questioning whether you are getting good value for money.
You should also try Boring Money's SIPP fee calculator.
The Teacher’s Pension Scheme
If you successfully find work as a teacher in the public sector, you may qualify for membership of the Teacher’s Pension Scheme.
This is a rare example of a ‘defined benefit’ pension – a form of retirement benefit where the amount of pension you build up depends on your salary and the number of years you are a member of the scheme.
The information in this article is for information purposes only and is not a personal recommendation or advice. Tax treatment depends on your individual circumstances and rules may change.
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