SIPP, Hargreaves Lansdown and Funds

vivvov

Hello All
New to all this.
Back ground. I’m 45. I’ve paid off my mortgage on my flat (and own a narrowboat). No dependants and not intending to either.
I’m about to study an MA in Social Work for 2 years so will be out of the loop re employment for those 2 years. After that, Social Work won’t ever take me into the higher tax band. However the flat should be rented out for approx £10k per year gross (on top around £35k SW salary and I presume I will enter into an employers pension scheme) whilst I live on my boat until it sinks below the waves…Next the Pension bit

I have a previous pension with Friends Provident. It’s a pension I signed up for with a previous employer in which they then paid 10% of my salary into a pension (I had the option of contributing but didn’t). Free money!
I also seemed to have agreed to opt out of SERPs at the same time.
Subsequently I seem to have built up approx £35k of free money in a “with profits” pension with Friends Provident. Although from the look of it the only profit my free money has been hammered by annual fees. Still, free money.
I received updates and just filed them away thinking I must do something about this, I must see an IFA and figure out what this actually means.
I left that job with the intention of undertaking an MA in Social Work but due to illness in the family, have had to put this on hold for 2 year. Subsequently I was unemployed for a while but I’ve taken up a short term contract to fill the gap. Around £25k salary per year and saved around £10k over 2 years (came from a poor family and am a panic saver “in case of emergencies”).

Meanwhile I did actually get round to seeing an IFA. In the initial free consultation he informed me that he could help me with the “with profits funds”and the opted out SERPs could be moved into a far better performing fund (seem to remember he mentioned actively managed fund of funds). He also analysed my income, my likely income, my spare cash and other circumstances to establish how we might proceed.
At this point he asked me to sign a cheque for £200 prior to him writing up a report and recommendations. If I didn’t take up his recommendations the £200 was his to keep (is this normal?) so I thought, ah, no…I’ll google pension, have a think and a read etc and get back to him. The £200 going in or no going back fee put me off. (then again why would he spend time and effort writing up a report specifically suited to my every need, have me blow it out and not get paid?..I’m sure he wouldn’t cut and paste my name into a previously done report).
Subsequently I have now had the impetus to start reading up on pensions. I started at the MSE Hargreaves Lansdown SIPPs thread..LH had sent me some info on funds and their SIPPs and ISAs wrappers. It seemed maybe a SIPP might be the vehicle for me to funnel the £35k into. I read it and can appreciate that with all those options to choose from and if I actively pick, monitor and do it well, then it might just be the thing for me to funnel the £35k pension into. Plus I have £15k of cash ISAs and £15k of NS+I Index linked squirreled away plus £10k saved from the last two years. BUT is SIPP the right thing to do?
Jamesd and Dunstonh seem to consistently provide astute info. Dunstonh points out continually, pick wrong and the approx 2% SIPP annual management fee chomps away at my little pension pot so I wasn’t at all sure. Dunstonh talks about other options that seems to involve me linking up with an IFA..they get their commission and I get their wealth of knowledge plus reduced annual management fees, but would this route allow me to access the wealth of dynamic/profitable funds etc.
Do other options that get talked about..ppp?..have the same scope to pick as diverse an amount of funds as SIPPs that have the potential to provide top class returns?

I then started on the Pension vs ISA thread and I am beginning to appreciate that they’re both wrappers and it might be best to be strategic and plan for a combined pension (state and personal) that comes in around the £10k mark in order to maximise tax benefit then ISAs. I don’t expect ever to be in the higher tax band but I do expect to save (plus probably contribute to an employers pension once I’m in Social Services/NHS or related, for approx 15 to 20 years up until retirement).

So am I right in assuming that the thread seems, at present, to recommend pension up to the £10k mark then the rest in ISAs in order to maximise the tax advantages on the pension including the 25% tax fee lump sum at (possibly) 55 years old?
Plus am I right in assuming I should be attempting to follow the above action for the moment (until the rules change)?

Or is there potentially better ways of doing all this?

I have no dependants. I might end up sad and lonely in my dotage but not bothered about leaving anything behind….is annuity or income drawdown best?..and if I pump any free money into a pension but stall from buying an annuity (isn’t the choice to do so going up to 75 years old?)..is that the best thing as opposed to the pension and ISA route?

I’ll continue to read on but thought I’d better ask some questions now before the post ends up book length.
Finally, I feel I am coming across as some the wiser..but I actually, really feel non the wiser at present. At the start and confused..so would very much appreciate people’s input.
Saying that, I hope I’ll get the hang of it. I do like being in control of my finances.
Property and mortgage sorted. Now time for figuring out the dreaded “pension”.

Sorry for rambling and pre emptive thanks for any input.

Vivvov

dunstonh

If I didn’t take up his recommendations the £200 was his to keep (is this normal?)

It is the norm. You are buying the advice. Not the product.

Subsequently I have now had the impetus to start reading up on pensions. I started at the MSE Hargreaves Lansdown SIPPs thread..LH had sent me some info on funds and their SIPPs and ISAs wrappers. It seemed maybe a SIPP might be the vehicle for me to funnel the £35k into. I read it and can appreciate that with all those options to choose from and if I actively pick, monitor and do it well, then it might just be the thing for me to funnel the £35k pension into. Plus I have £15k of cash ISAs and £15k of NS+I Index linked squirreled away plus £10k saved from the last two years. BUT is SIPP the right thing to do?

You do realise that the SIPP from HL will cost you more than the £200 the adviser was being paid for the report?

Jamesd and Dunstonh seem to consistently provide astute info. Dunstonh points out continually, pick wrong and the approx 2% SIPP annual management fee chomps away at my little pension pot so I wasn’t at all sure. Dunstonh talks about other options that seems to involve me linking up with an IFA..they get their commission and I get their wealth of knowledge plus reduced annual management fees, but would this route allow me to access the wealth of dynamic/profitable funds etc.

The SIPP is typically one of the more expensive options when utilising managed funds. If you use the features and options then it can be money well spent. If you dont then you are paying for something that can be done cheaper in a personal pension.

Why are you worried about an IFA earning commission when you saw an IFA on fee basis? If you go DIY with HL, they get 0.5% a year. Go fee basis with an IFA and tell them you dont want servicing and you can get that 0.5% rebated. On £35k fund value thats a £175. Multiply that over the years you have have left vs the fee you could have paid the IFA and you soon realise that that IFA in this case was better value.

Do other options that get talked about..ppp?..have the same scope to pick as diverse an amount of funds as SIPPs that have the potential to provide top class returns?

SIPPs were designed to allow direct investments to be used. Not funds. Its just in more recent times that funds have become common as direct to public offerings have pushed them. Personally I have a personal pension. I dont see the need to pay extra for a SIPP when a platform based personal pension is cheaper whilst offering platform levels of funds.

So am I right in assuming that the thread seems, at present, to recommend pension up to the £10k mark then the rest in ISAs in order to maximise the tax advantages on the pension including the 25% tax fee lump sum at (possibly) 55 years old?

The £10k mark is income and is total income. Not fund value.

is annuity or income drawdown best?

worry about it when you get there. Its odds on the rules then wont be the same as now.

nd if I pump any free money into a pension but stall from buying an annuity (isn’t the choice to do so going up to 75 years old?)..is that the best thing as opposed to the pension and ISA route?

The age 75 rules are changing. Alternatively secured pensions are being replaced to allow unsecured pensions to continue without the need to move into an ASP or annuity. Pension will beat ISA for income provision (up to higher rate tax). ISA will beat pension for capital provision.

george278

Dunstonh,
HL only charge 0.5% on their SIPP if you go outside of the 2000+ funds that they recommend. Surely this enough choice for most people so that they do not to have to incur this charge.

jem16

george278 wrote: »

Dunstonh,
HL only charge 0.5% on their SIPP if you go outside of the 2000+ funds that they recommend. Surely this enough choice for most people so that they do not to have to incur this charge.

It's nothing to do with an extra 0.5% charge that you refer to.

It's the normal 1.5% typical retail annual management charge of most funds. Out of that 1.5%, 0.5% is paid to the IFA as trail commission for servicing. If you want no servicing that 0.5% can be rebated but HL do not rebate this 0.5% on their SIPP.

sabretoothtigger

Often I see an institutional version of the fund I use rather then retail and its less then half the fees. I wouldnt mind access to those, that's probably well worth it for people with large pots.
For me HL is ok just because there is no fixed fees, anyone over 100k needs to realise the percentages matter far more.
Was looking at cofunds site, seems they let you half the fees with the I class if you invest 100k in a fund at a time, not sure I got that right

dunstonh

Often I see an institutional version of the fund I use rather then retail and its less then half the fees. I wouldnt mind access to those, that's probably well worth it for people with large pots.

These are increasingly becoming available on "unbundled" platforms but you shouldnt expect to see many of them appear on "bundled" platforms. A few bundled platforms have a couple in place as loss leaders but if everyone used institutional funds on a bundled platform, the platform would fail. Unbundled platforms can offer institutional funds as they do not take a cut of the AMC or are not paid by the fund house to market their funds.

HL is currently set up as a bundled platform and every indication is that they want to remain that way. Bundled platforms are definitely the best option for the small investor as unbundled platforms are not priced to look attractive to small investors. They want higher value holdings. The biggest issue for HL coming up is that currently on the HL SIPP they keep the natural fund based trail in full (on top of the platform provider cut and any rebates and marketing payments paid by the fund house). There will be no natural fund based trail on new business from the end of 2012 (this also includes fund switches). So, if everyone switches funds on the HL SIPP (or ISAs or unwrapped) in 2013, then they lose all the natural fund based trail. If they have around £14 billion on platform and lose around 0.3% of that (as average) then that is a significant loss of income. So, do they start charging people instead to make up that difference or accept the loss? At the moment they are saying that they want the fund houses to keep paying them the natural trail. However, that is illogical. If a 1.5% AMC fund has 0.5% as natural trail with around 0.6% going to platform and 0.4% being kept by the fund house then the fund house cannot reduce their cut by enough to meet the natural trail being lost.


In respect of George278 response, Jem16 has covered it. The managed funds you see on HL pay 0.5% p.a. typically to the IFA/retailer. HL keep that 0.5%. An IFA servicing will typically keep that 0.5%. However, if you just want one off transactional advice on fee basis then an IFA can rebate that 0.5%. Therefore making the annual charge 0.5% lower.

jamesd

HL typically gets paid 0.5% of the invested fund value a year, divided up and paid each month. That's part of the background charging done by the funds that pays HL indirectly in their SIPP. On £35,000 you'd be paying them £175 a year this way.

An IFA other than HL would probably offer you products where there all or most of that 0.5% would be eliminated so it'd be worth paying something for the service in the short term to save money long term.

With profits funds are typically a poor deal. In suggesting a fund of fund the IFA probably believed that you didn't know much about funds and didn't want to learn. Something like the funds in the Jupiter merlin range is good for people like this if you also don't want to pay an IFA for annual or more frequent servicing with fund rebalancing and changing. Given your study and work situation that's reasonable at the moment and it might not be worth it on cost grounds for the IFA to perform servicing for you yet.

The £10,000 a year in pension income target is based on about that much income free of income tax from age 65. Up to that point you get all of the pension tax relief on the way in and no tax on the way out, so it's pure gain. About £7,500 of that will come from a full state pensions record at state pension age, at least 68 for you, likely to become older before you get there. That means a £2,500 income target for your own pension provision. Assuming a very cautious income level of 4% of pension pot size that takes about £62,500 pension pot size. I normally use 6% which would take £41,666.

The catch with pension drawdown for income is that the amount you can take is quite limited at age 55 and before state pension age and those pensions it may be necessary to draw on capital at a much faster rate. That's where the stocks and shares ISA comes into play because you can draw it at any required rate. But it's subject to benefits means tests and at risk if you become unemployed for a long time.

john_kane_2

pension advice much appreciated!

am thinking of setting up a SIPP, I'll try to keep it to the key figures:

age: 26.5

net worth: £240K

split currently as:
H-L funds: £60k (equities, commodities)
gold/silver: £58k (online gold, gold funds on H-L)
cash: £50k (both GBP and CHF)
friends struggling company: £20k
company pension: £2k

NB: about £30k of the H-L funds are in an ISA.

That adds up to £190k.

I then have around £50k on unrealised gains, mainly on the gold/silver, but also some of the H-L equity and commodity funds.

Occupation: I qualified as a chartered accountant a few months ago but now run a couple of websites 'giving it a shot' to escape the office grind'

Future income: I'd hope to be earning min £50k going forward and maintain this in real terms.

My question:

By the time I'm in my mid 30s (a huge amount can change in this time I appreciate!) but I'd plan to then settle down by buying a house (I currently rent as I like the flexibility).

In real terms I'd like to be able to afford a place around £600k or so, not sure if this is too ambitious.

I am not sure whether given I have a lot of H-L funds outside an ISA and outside a pension, whether to put some of this into a SIPP?

Alternatively, should I be aiming to max out my ISA every year (say £10k in real terms every year going forward) and treat that as my pension? (I've been reading some the SIPP vs ISA thread)

Then everything outside the £10k I'd look to put aside for spending money+ deposit on a house?

Many thanks if you could let me know your thoughts,

Chris

sabretoothtigger

treat that as my pension

Roughly speaking if you pay into a SIPP they give 20% bonus on that money I think, from your taxes. ISA wont do that, it only helps going forward so just on that fact I dont see how it could compete. ISA is more flexible and suitable for a house deposit I guess

sabelu

Received letter and flyer this morning from HL.

This told me the consequences of new legislation and my drawdown started tax year 2009/10.

What are the main changes and their impact?

Apparently I now going to be transferred to a capped drawdown.

Apparntly I can request a review on its next anniversary (in fact its 1st) rather than wait for five years, the next review would be five years later, and then tri yearly thereafter, whats thebenefit of this if you intend to defer drawdown for at least ten years?