Providers of ‘low-cost’ SIPPs have come under fire for potentially misleading investors about the actual costs of running their plans.
But it is possible to run a SIPP with lower costs than traditional pension schemes. The issue flared up because Hargreaves Lansdown has been aggressive in promoting its Vantage SIPP as the cheapest plan of its type.
But what a SIPP really costs depends not just on the charges levied by the plan provider (in this case HL) but on the costs of what you choose to buy inside it. And there are wrinkles in the Hargreaves Lansdown Vantage SIPP that mean you may pay more than you expect.
Some funds will cost you more with the Vantage
Many of the funds offered on the Hargreaves Lansdown fund supermarket have annual charges of 1.5% to 2%. So if you invest in funds like these within your SIPP, your costs will exceed not just the costs of the stakeholder pension scheme (1.5% a year for the first ten years, 1% thereafter) but the cost of many traditional insurance company schemes, where the annual charge can be as little as 1%.
One of the arguments for using a SIPP is that you have a wider choice of investments, and this should enable you to make higher returns, which should therefore more than cover the costs of any extra charges. But this is by no means guaranteed.
You might choose high-risk funds with high charges that lose money. So you should only choose a fund-based SIPP if you plan to manage it actively yourself. Otherwise, annual costs of 1.5%- 2% could be a real handicap.
How to keep the costs down
Instead, you may agree with the academics that trying to beat the market is a waste of time and plan to use index-trackers for your pension fund. Our own selected best-buy UK index tracker fund, Fidelity Moneybuilder UK Index, has annual costs of just 0.3%.
But if you buy this fund within the Hargreaves Lansdown Vantage SIPP, you get charged an extra 0.5% a year by HL - it is one of hundreds of funds where such an extra charge applies. And if you want to buy one of the dozens of low-cost Exchange Traded Funds (ETF) that track an index, HL will also levy a 0.5% annual charge. Oddly, you can buy one other low-cost index tracker fund- HSBC All-Share Index- through HL with annual costs of just 0.27% and no extra charge.
So, as I’ve said before, HL Vantage is a low-cost SIPP - but only if you stick to the funds where you don’t pay extra charges, and don’t invest in shares at all. If you want to create a portfolio of ETFs in your SIPP, then the HL plan is not the cheapest option.
Sippdealextra is cheaper for shares
If you want to buy shares (including ETFs) in your SIPP, the sippdealextra SIPP plan can work out cheaper. There’s no set-up fee and then a quarterly administration charge of £20 (up to £25,000), £30 (£50,000) or £40 (£50,000-plus).
If you use Selftrade as your stockbroker you will pay a flat dealing charge of £12.50, which is very good value on larger deals. Then you can buy index-tracking Exchange Traded Funds if you want to keep your costs as low as possible.
On any fund over £50,000, sippdealextra’s plan will work out cheaper than HL Vantage if you invest only in shares. However, if you want to hold funds in your SIPP, it remains the case that HL Vantage has the largest list of funds available with no initial purchase charges at all.
Meanwhile, Fidelity FundsNetwork is currently promoting its SIPP (which is in fact a white-labelled version of Standard Life’s plan) as free for life- no initial charges and no annual charges ever for those who sign up before May. But on average, the initial charges on funds in the FundsNetwork supermarket are higher than in HL’s, so this is not a terrific deal.
