The Turner Commission says most of us need to save more. But in the new world of pensions the big question is, should you use one of the new-kid-on-the-block SIPPs or a low-cost stakeholder pension scheme? The answer may surprise you.
Under the new rules that take effect next April, all UK pension schemes get the same tax breaks and operate under the same rules. So will you be better off using a simple, plain-vanilla, low-cost stakeholder pension scheme or a Self Invested Personal Pension that gives you lots more investment choices, including residential property?
All stakeholder pension plans have charges capped by law at a maximum of 1.5% a year for the first 10 years and 1.0% a year thereafter. That sounds low, but stakeholder schemes aren't necessarily good value. Look at it this way: you can buy Fidelity's UK Index Tracker fund in your own name and pay just 0.3% a year in charges. Why should you pay 1.5% a year for an almost identical fund run by Legal & General or Halifax inside a wrapping called a stakeholder pension?
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Let's get rid of the insurance companies' answer to this. They say that they need to pay someone to advise you, and the payment- as a commission- comes out of what you pay into the scheme. Well, if you want to sit around and wait for some insurance company rep to advise you, you're in the wrong place, because I will go on telling you forever that this is a really bad idea, that you will pay over the odds for everything you buy and that most of the products you buy will be poor value. If you are prepared to engage your brain and make a few decisions, you can choose a better pension plan and one that will cost you less. And if your affairs are complicated and you need advice, then pay fees to an independent adviser, not commissions to a product-flogging salesman masquerading as a 'whole of market' adviser.
The lowest-cost pension plan is a SIPP
The Self Invested Personal Pension is regarded by financial planners as the Rolls-Royce of pension plans for individuals. Yet my research proves it can also be the cheapest form of pension plan for anyone with over £10,000 in their fund. Is it time to trade in your Astra for a Roller?
Thanks to the internet, the cost of running a Self Invested Personal Pension or SIPP has tumbled so far in the last two years that it can be cheaper to set up one of these 'bespoke' schemes. Instead of simply having a limited range of insurance-run funds, you get to choose your own shares or funds from all those available on the market. In all other respects- the rules on what you can contribute and what you can take out, the tax and so forth- the schemes are exactly the same.
Three low-cost contenders
I'm going to focus on three SIPP schemes designed to operate at low cost on the internet: those run by Hargreaves Lansdown, The Share Centre and Squaregain.
Hargreaves Lansdown's appears the simplest and cheapest proposition. There is no set-up fee and no annual fee if your money is invested in funds. If you invest in shares, then there is an annual fee of 0.5% of the value of the shares. And there are dealing charges when you buy and sell.
Both The Share Centre and Squaregain use Sippdeal as their trustee (every pension scheme must have one). Sippdeal levies an annual charge of a minimum of £80 a year rising to a flat £160 for those with over £50,000 in their plans. But Squaregain's share dealing charges are lower than Hargreaves Lansdown's, especially for larger deals. On a £3,000 deal HL charges £19.95 compared with Squaregain's flat £12.50. So if you have more than £10,000 or so and plan to invest only in shares, Sippdeal/Squaregain is cheaper than HL.
I must declare an interest here since I have been using the Sippdeal/Squaregain SIPP for over a year. So far it has run perfectly without a single admin glitch.
The Share Centre charges a flat £80 a year, for which you then get a flat £7.50 per share deal charge not only on your SIPP but on an ISA account and a straight nominee sharedealing account. Depending on how often you deal, that means The Share Centre could also work out cheaper than HL if you hold only shares worth about £20,000 in your SIPP.
Where HL scores is on funds, because when you only hold funds there is no annual charge (HL collects 'trail' commission at an annual 0.5% from the fund managers). Not only that, it has better discounts on initial charges on funds than The Share Centre or Squaregain.
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So which one of these three plans ends up cheapest depends on how much of your fund you hold in funds or shares, the value of your fund and how often you deal. But all three are exceptionally good value set against a stakeholder pension where you just get plain vanilla insurance company funds but pay 1.5% a year, and all look as if they will be cheaper for anyone investing between £10,000 and £15,000 in shares.
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If a SIPP is so cheap, should you transfer from an existing stakeholder pension or personal pension to a SIPP? If you want to make use of the greater investment freedoms the SIPP provides, I believe there is a strong case for doing so. But watch out for other costs:
· If you switch out of a stakeholder pension plan, there will only be a modest administration charge. But if you switch out of personal pension to a SIPP, there could be a much larger charge. You need to ask the insurance company to tell you what the transfer value is, and compare this with the ongoing value of the plan.
· If you are thinking of switching money out of a former employer's 'money purchase' scheme, this should be straightforward and you should not incur high charges. But do not switch out of an employer's 'final salary' scheme without obtaining expert advice.
· If you plan to buy property or other assets in your SIPP, ask the SIPP provider for a detailed estimate of the costs involved. They could be substantial.
Make the most of investment freedom
There are a few other SIPP providers that may look even cheaper, like Alliance Trust and Baillie Gifford,
but they restrict your choice of investments, and since the whole point of having the SIPP is to improve investment returns, I cannot see that this makes sense. In any case, HL, Share Centre and Squaregain all allow you to buy investment trust shares such as British Empire Securities and Foreign & Colonial Investment Trust, which have charges far below the 1.5% stakeholder level- so you can even get the equivalent of the plain vanilla stakeholder funds, but with real cream in the ice cream.
My conclusion is that anyone who has or expects soon to have a pension fund of over £10,000 can manage it more cheaply in the form of a SIPP than a typical insurance company stakehol
