The choice of your first pension plan can be complicated, but when it comes to a top-up pension plan it’s easy: it should be a SIPP.
For people with no pension plan, the arrival of Personal Accounts in 2012 presents a great savings opportunity - see my recent explanation. Those eligible for employer-sponsored pensions should join up.
But for people who are looking to save extra money towards retirement, for themselves or for non-working wives or husbands, the choice is easy: a Self Invested Personal Pension(SIPP).
Download our free Guide to SIPPs here.
Become your own pension fund manger
A SIPP is a personal pension scheme that allows you to choose from a wide range of investments. Effectively you become your own pension fund manager. That sounds like a Rolls Royce, but actually we are talking Mondeo or even Astra prices. With some SIPP providers there are no annual charges at all - you pay only the annual charges of the funds you invest in.
As far as pension top-ups are concerned, there are two distinct types:
Small regular top-ups, often for non-working spouses
Lump sum transfers from old schemes or big cash payments from bonuses.
For small contributions, a cheap-and-cheerful plan with a limited range of investment options is usually going to be the right choice, while for larger sums, you may want to consider a plan with higher charges that gives access to a wider investment range. You can view my Best Buy SIPP recommendations here
Arrange a pension review with a SIPP expert
Low-cost plans with online dealing
I’ve chosen two low-cost plans to illustrate what you can get.
Hargreaves Lansdown Vantage SIPP has no initial set-up charge. If you invest only in its selected range of 1,400 funds, there is no annual charge (HL get ‘trail’ commission of 0.5% from the fund managers).
If you invest in shares or other funds, you pay 0.5% a year of the value of the assets invested in this way. Most of the 1,400 funds are available with an initial charge of 0.5% or less. Charges for share purchases range from £9.95 on £500 to £24.95 on over £20,000.
Alliance Trust is a big investment trust manager. Its Select SIPP also has no initial charge. There is no annual charge either. You pay £15 plus 0.2% when buying shares or a flat £15 when buying funds. Fund discounts are not as good as those offered by HL, but costs for buying Alliance’s own trusts are lower. You can view my Best Buy SIPP recommendations here.
Advertiser link: Order free brochures from leading SIPP providers
Don’t leave cash on deposit in a pension
Most SIPP providers earn a bit of money by paying you low rates on any cash you leave on deposit. HL is better than most but still pays only 1% on the first £500 and 2.5% on the next £3,000. Alliance Trust pays only 2.6% on balances over £9,000.
Some providers make a big song and dance about interest rates on cash, but if you are going to leave big sums on deposit for long periods you probably shouldn’t be bothering with a pension plan at all.
And in any case, there are also ‘Money market’ unit funds you can buy with no initial charge that pay market-related interest rates, so if you do have a good reason for wanting to hold a chunk in cash, there are ways of earning a decent rate on it without having to rely on the SIPP provider itself.
You can view my Best Buy SIPP recommendations here
Recycle cash and collect tax relief
Given these low charges, you can use SIPPs to make annual contributions for a non-earner. Even if you have no earnings and therefore pay no tax, you are allowed to contribute £2,808 a year to a pension plan and get basic rate tax relief.
The pension provider reclaims £792 from the Treasury. You now have £3,600 in the fund. This can be done each year up to age 75, at which point the fund must be used to buy a lifetime pension income – but at that point 25% of the fund value may be taken as a tax-free lump sum.
Why use a SIPP for a plan like this? So that you can select suitable funds - anything from a really cautious fund with capital protected from a stock market crash to a gung-ho China Growth fund. Use our Best Buys to select suitable funds in 14 different categories.
Advertiser link: Order free brochures from leading SIPP providers
Pay higher charges for more choices and features
The two plans mentioned above are plain vanilla and offer no bells and whistles. The range of permitted investments in pension plans is far wider, but the cost of administering an account where you can trade in Contracts for Difference (CFDs) or buy commercial property is higher. So if you want to buy your own commercial property, or wheel and deal in overseas shares or CFDs, you will need to choose a different plan.
Typical of mid-range plans is the one I use, run by sippdeal. Sippdeal is managed by AJ. Bell, a consulting actuary business with a reputation for technical knowledge. Sippdeal is available direct (via sippdealextra) or the sippcentre (through independent advisers). Sippdealxtra costs £120 set-up (waived if you start a plan before the end of the current tax year) and an annual charge of £80 (up to £25,000 fund value) to £160 (over £50,000).
You can use any one of four stockbrokers: Selftrade, The Share Centre, Redmayne Bentley or Jarvis. I use Selftrade and pay a flat £12.50 per trade (excellent value for larger deals). None of these brokers offer as wide a range of funds or as large fund discounts as Hargreaves Lansdown, so if all you want is funds, HL’s plan is more suitable. You can view my Best Buy SIPP recommendations here.
Arrange a pension review with a SIPP expert
For seriously big funds take the ‘bespoke’ option
For large sums of over £200,000, and where you want to buy property, a ‘bespoke’ SIPP is likely to be more suitable. There are dozens of providers of such plans, with typical set-up costs of £500 and annual charges of £750 plus transaction and other charges. While this may sound a lot, the costs of running this type of SIPP can still work out at less than the annual charges on an old-fashioned insurance company plan.
Running your own pension fund may sound scary but in the end it is your money and as many people who have set up their own SIPPs say, nobody else cares as much about your money as you do.
The boom in SIPPs - hundreds of thousand of people
