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[MSE Archna]

This discussion relates to the

Cheapest Sipp: build yourself a low cost DIY pension Article

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[whambamboo]

Since a SIPP is essentially an ISA with more restrictions and higher costs, a comparison with it would come in handy.

E.g.,

£3900 to invest in an ISA - by 65, it would be worth at 7% PA growth + 0.5% annual commission rebate for a 25 year old: 3900 * 1.075 ^ 40 = £70,372

£5,000 to invest in a SIPP - by 65, you would have 5000 * 1.07 ^ 40 = £74,872

So the SIPP has only slightly more money by 65, despite the much larger initial investment (thanks to tax relief). But then when it comes to income, the ISA is yours to do what you like with, and all income is not taxable - you can spend it all and enjoy yourself.

But with a pension, you'd pay 22% tax on the income coming out and you're forced into either an annuity or income drawdown. Annuities are very expensive because gilt yields are so low (the government's cost of borrowing is very cheap at the expense of pensioners).

And income drawdown is capped at 120% of the annuity rates (i.e. very low), so you'll probably never spend most of your pension anyway.

So you won't ever see much benefit from it really.

[whambamboo]

Is part of this article missing?

It refers to

Sharedealing fees. It has dealing charges for buying and selling individual shares online ranging from £9.95 to £29.95 (See table of charges).

Decent cash interest rates. If you are keeping money in cash, the interest rates are very good for amount over £7,000. For lesser sums it can be somewhat disappointing (see rates).

But there is no table of charges on MSE to compare the products, or other information on the costs of the other products.

BTW, the interest rates are not 'very good' over £7,000, as the interest rate is tiered:

http://www.h-l.co.uk/our_services/in..._rates_sipp.hl

1% AER on first £500
2.27% AER on next £2500
3.82% AER on next £3000
4.85% AER above that

so on £7,000, you get 2.52% effective AER :-(

here are the numbers:
£10000, 3.22% AER
£20000, 4.03% AER
£50000, 4.52% AER
£100000, 4.69% AER

[whambamboo]

oh and another thing, HL's sipp doesn't appear to be cheapest at all, unless you want to buy commission-paying funds. The annual fee is 0.5875% on *all* shares for instance.

So if you want to buy shares then HL is going to charge you 0.5875% PA on top of its dealing costs.

Sippdeal or Alliance Trust Select Sipp don't have annual charges like this.

[wotsthat]

The most cost effective way to run a SIPP is to hold shares directly and make sure that the SIPP provider doesn't charge an annual fee. i.e. choose sippdeal or alliance trust.

I can't any sense in investing in funds within SIPP's - there's still a fund providers annual fee to pay.

I've been blindly putting money into a pension for years and only just realised that I would have been better off using ISA's which would have given me more control over capital as well.

I'm now using ISA's for retirement saving and a SIPP (invested in shares) as a home for my old pension fund. I'd only consider contributing more cash to my SIPP if I'd used all my ISA allowance.

[EdInvestor]

For anyone who wants to do regular monthly contributions into a fund investment in a SIPP, I think there's no doubt H-L is the cheapest.

But for transfers in of a lump sum ( eg consolidating old pensions),particularly if wanting mainly shares or a mixed portfolio of shares and funds with little buying or selling, I'd have thought Sippdeal would be the winner: it also has a better cash interest rate and first class admin/service (the industry leader on the technical side of Sipps).

www.sippdeal.co.uk

I hesitate to recommend www.alliancetrust.co.uk yet, as its internet platform is very new, though it certainly has its fans, especially among investment trust fanciers.

It is probably second cheapest for regular contributions into funds after HL and 2nd best after Sippdeal for shares and portfolios where there are few transactions. Investment in its own ITs is very cheap.

I can't any sense in investing in funds within SIPPs - there's still a fund providers annual fee to pay.

Quite agree, the big advance with the new low cost online Sipps is the ability to hold shares directly and pay virtually no charges within a pension wrapper.

This offers potential for massive savings over the life of a pension.

#A note re regulation: your shares and funds (and cash) are not actually held at the Sipp company but in nominee accounts at the broker or fund manager or bank which is associated with the Sipp, which are themselves regulated.So there shouldn't be any need to worry about the security of the money.The lack of regulation before next year mainly impacts on the misselling side: effectively at present they are an "execution-only" product.You can't complain if you later make a loss and believe you were missold.

In addition, until regulation comes in, you can't move "protected rights"(Serps/S2P) pensions into a Sipp.

[whiteflag]

http://www.fsa.gov.uk/consumer/updat...cts/sipps.html

Shame it needed the FSA had to step in to make SIPPdeal amend their unfair terms.

A lesson to all DIYers that its important to fully understand "terms and conditions" - might not always have the FSA to help you out.

[whambamboo]

Originally Posted by whiteflag

http://www.fsa.gov.uk/consumer/updat...cts/sipps.html

Shame it needed the FSA had to step in to make SIPPdeal amend their unfair terms.

A lesson to all DIYers that its important to fully understand "terms and conditions" - might not always have the FSA to help you out.

THey chucked a load of exclusion clauses in their contract to cover themselves, but the clauses are unfair under the Unfair Terms in Consumer Contracts regulations. They hadn't enforced the terms, and might have not had any intention of doing so, and indeed they weren't enforceable under the law, so the consumer is actually worse off in a way following the FSA action, because the fair terms *are* enforceable.

This is not really a lesson to DIYers, the same thing could happen with any financial services company - they could include unfair terms, and if you wanted help to judge, the person to see would be a *LAWYER*, not a financial adviser. Simple solution - just reject them when they try to enforce them: they're illegal. You certainly don't need the FSA to help you out - I'm no lawyer but I've rejected unfair contract terms in the past and have sued where necessary

What is your line of business btw?

[dunstonh]

There was another article the other day about a few more low cost SIPP providers withdrawing from providing SIPPs due to the regulation coming in. A couple of scheme underwriters are pulling out as well.

[GTG]

Anyone recommend a SIPP that accepts commercial property?

TIA

[EdInvestor]

Try A.J.Bell (owners of Sippdeal).

[NeilW]

Originally Posted by whambamboo

So the SIPP has only slightly more money by 65, despite the much larger initial investment (thanks to tax relief). But then when it comes to income, the ISA is yours to do what you like with, and all income is not taxable - you can spend it all and enjoy yourself.

But with a pension, you'd pay 22% tax on the income coming out and you're forced into either an annuity or income drawdown. Annuities are very expensive because gilt yields are so low (the government's cost of borrowing is very cheap at the expense of pensioners).

And income drawdown is capped at 120% of the annuity rates (i.e. very low), so you'll probably never spend most of your pension anyway.

So you won't ever see much benefit from it really.

That's a little bit of a skewed view isn't it.

Firstly I'm no fan of registered pension schemes - SIPPS or otherwise. You sign away control of your capital and place the trusts under the regimes of successive governments. Since they have a history of fiddling with the things there are reasons to be cautious. However any assessment should be in possession of the full facts.

- The big advantage of a registered pension pot is that 25% can be drawn as a lump sum from the age of 55 tax free.

- Or you can leave the pot there untouched and growing tax free until your 75 if you want.

Up until the point that you take your pension there is a handy built in advantage. If you drop dead the entire fund goes to your beneficiaries *tax free* as a lump sum.

When you draw your pension firstly you take the 25% lump sum, and then you calculatate your pension - based on the GAD tables which are a projection of a single life level annuity. This is the highest annuity there is other than an impaired life one.

Currently for a 65 year old man it is £86.40 per £1000 per annum as gilt yields sit above 4.5%.

I make that's 8.6% available as taxable income - or about 6.75% net after tax.

(Gory details here if anybody wants to run the sheet for their own circumstances. Don't forget to multiply the basis amount by 120% though!)

And finally if you have a smart employer funding your SIPP then you avoid national insurance as well as tax. So that would be £5000 in the SIPP and only £3350 in the ISA.

The rates of change you used were defective as well. The gross return is 7% and commission comes off that. So with an ISA with a refund you'd get 6.5% (say) and the pension would suffer the full amount of commission and you'd get a 6% return.

One of the advantages of SIPPdeal is that, although they charge a management fee on paying into the fund the ongoing annual fees for the investment have been rebated hard. The net management fee rates are therefore similar to those available in ISAs.

Plus of course you only projected for one year. You'd need to sum the differences over 40 years, and if my sequencing is correct you'd end up with a gross pot difference of about £80,000 by retirement age even on your figures.

[NeilW]

I'm mightly disappointed with this article, since it misses the opportunity to explain the charge structure of pension schemes clearly to a mass audience.

All fund and wrapper systems have the following charges:

(i) Charge to accept money into the pension wrapper ('initial wrapper charge')
(ii) Ongoing wrapper charge ('annual wrapper management fee')
(iii) Charge to accept money into an investment ('initial investment charge')
(iv) The difference between the buying and selling prices of the investment ('the spread')
(v) Ongoing investment charge ('annual investment management fee')

And what's annoying is that investment yields are always quoted before (v) is deducted - unlike deposit accounts!

So you've got to be really careful when assessing investment systems - particularly long term ones like pensions that you take into account all five layers of the charging system, and that you take them into account over the lifetime of the investment.

You can't assess the wrapper in isolation because the reduction in the wrapper management fee will probably pop up again in the investment management fee, the initial investment charge or the spread.

Don't fall for the water balloon game that pension providers like to play, where reduction in charges in one area pop up in other areas - confusing all those without a PhD in Operational Statistics.

Please look at revising this article urgently.

NeilW

[GTG]

Originally Posted by EdInvestor

Try A.J.Bell (owners of Sippdeal).

Is this a recommendation or just a pointer.

Thanks.

[dunstonh]

As Ed has never done a commercial property inside a SIPP, I dont think it could be classed as a recommendation. More a case of "heres a provider that does it".

With commerical property in a SIPP, there is more important things than cost and that is getting the trustees to agree with the property being acceptable and making sure the terms of the contract fit in with your requirements.

[GTG]

Thanks for the tips dunstonh, am I correct to assume that all IFA's are qualified to advise a client on SIPPs that involve commercial property?

[dunstonh]

All are authorised but I would say a small minority are actually capable. I have been involved in one and wouldn't do it again.

I would go for one that specialises in the commercial side of things as they are more likely to have more frequent experience of this. It is a minority transaction so it may take a few calls. You would have to be wary of an adviser saying they can do it when they have no experience on that front. So make sure you question the experience of the adviser on that front. If they havent done one before, then dont use them.

You need someone clued up and knows the limitations and workings of the different trustees and you only get that with experience.

[newby52]

Can anyone advise if there is planned regulation coming into force to allow
"protected rights"(Serps/S2P) pensions to be moved into a Sipp and if so when ?
Also will the 25% cash lump sum be available from the protected rights sum and if so at what age is it allowed to be taken.

Thanks

[gozzy]

No-one has mentioned Alliance Trust SIPP which I think if I remember only charges one-off fees like £15 for each puchase/sale and no annual mgmt or setup fee. You ahve to have some Alliance Trust shares in your portfolio , but they ahve a massive list of other funds/Trusts/shares you can purchase. They don't advertise very much so are rather unknown by the general public.

[EdInvestor]

Originally Posted by newby52

Can anyone advise if there is planned regulation coming into force to allow "protected rights"(Serps/S2P) pensions to be moved into a Sipp and if so when ?

Now delayed until the end of the year at the earliest

Edit: Allowed from October 2008

Also will the 25% cash lump sum be available from the protected rights sum and if so at what age is it allowed to be taken.Thanks

Available now from aged 50.

BUT, in order to access it you have to put the rest of the pension into income drawdown.This has been legally allowed for years, but only at insurance companies.

However insurance companies won't accept small funds for drawdown.Sipps will accept small funds, but aren't allowed to take PR money.

So the catch 22 is that if you want to get hold of your protected rights tax free cash at 50 you either have to

a)move your main fund from your SIPP back to an insurance company SIPP so that the total value of the funds in drawdown is more than 100k

b)take benefits from your PR fund in the form of tax free cash and an annuity.


Quite why the DWP is assisting the insurers to abuse independent-minded investors with high charges and trap them in obsolete products is really hard to say.