30 April 2017
With the State Pension age edging upwards and news of ever more final salary schemes closing, the direction of travel seems clear to me. It’s increasingly up to us to take care of ourselves in retirement.
That’s easy to say but pensions have never been the most fascinating nor accessible topic! Finding the money today to save for tomorrow. Dealing with rigid companies who keep us on hold. Impenetrable statements which no-one understands. However, 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, I would consider a SIPP – a self-invested personal pension. These pension products typically offer online access, transparent charges, choices of where you actually 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.
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? These days, I think all-in costs of a SIPP for DIY investors should be no more than 1.3% all-in. That includes the lot- pension administration, reports, support and investments. You will typically pay a fee for the pension product itself, and then a fee for the investments you choose to put into this.
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. I 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 are bring re-written.
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, using their own range of ‘passive funds’ which were launched this month. This Manchester based firm, better known by financial advisers than consumers as a pensions expert, has a good culture and ethos. It’s not the slickest online experience but the charges are very competitive. Choose between 5 funds to put into your SIPP, according to which one best reflects the mix of investments you want.
Fees will be 0.5% a year for the in-house passive funds. This is a special introductory rate until January 2019 after which the standard 0.25% administration fee will apply each year 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’ which aims to simplify the investment process. They offer a choice of 10 ‘fixed allocation’ portfolios. Simply answer the straightforward set-up questions and you will be allocated to the portfolio (or bundle of investments) which they think is suitable for your needs. This is an easy path for people who want an option to ‘set and forget’ their pension savings.
Fees for a £50,000 pension lump sum, invested in their ‘fixed allocation’ portfolios are circa 0.64% all-in. That’s £320 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, Hargreaves Lansdown is a good service. It’s not the cheapest but the people on the phones know their stuff . It’s a decent option for time-poor impatient people who just like things to work. You will like this service more if you are comfortable navigating the world of investments and happy to decide what to put into your pensions savings account.
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 Vanguard LifeStrategy’s at an additional 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 IFAs 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 0.18% for pension administration (though there’s an extra annual fee of £195 for portfolios of less than £195,000). There are some extra charges based on activity on the account and you also need to factor in the underlying investments. Including commercial property carries separate fees.