Warning re Stakeholders/Personal Pension vs SIPPS

dunstonh

The Hybrid SIPPs are not out until 6th April so no use to you in this years contribution.

We have been told that it will not have any charges on the SIPP wrapper at all and buying of funds will be direct (so no need for cash account). It will be exactly the same as buying unit trust/ISAs from a fund supermarket, except within a pension.

PPPs have modernised significantly over the last 3 years. So whilst he choice of SIPP in the past was clear cut, it is less so now that you can get all the major funds in a PPP, often at less cost (on a like for like basis).

The IP UK equity fund is available on a certain PPP with an AMC of less than 1%. If you plan to buy just one fund, you may as well use a stakeholder as one fund investing is not a good way to go.

moneytroll

But there doesn't seem to be any other charge except the 1.25% amc. The 5% ic is discounted and I don't see how purchasing this fund (or equivalent) through SIPP is any different than through ISA in terms of charges. (Have I overlooked anything? I apologize in advance then.) So how would hybrid SIPP be more beneficial in this instance?

I am planning to buy a different fund each year for retirement (depending on the current ecnonomic situation etc) and thought that monitoring them would be easy if purchased through SIPP via the same provider. Would stakeholder still be better in you opinion? I mean in thirty years I will have at least 30 different funds...or so I hope.

Also could you possibly let me know which PPP has an amc that is less than 1% for these type of funds? (from earlier posts, I suspect it would be Skandia, though I couldn't find their charges on their site). That's incredibly low. I was purchasing ISA funds with an amc of around 1.5% (well, the TER is somehow always a little higher, at about 1.7%) thinking it's very cheap. Now I am confused where you guys come up with such cheap funds of less than 1% (i am not talking about index or fund of funds etc).

Thank you for the patience.

dunstonh

So how would hybrid SIPP be more beneficial in this instance?

You pay charges on the SIPP wrapper itself. Some of these currently have no charge but others do (valuations £2 a go for example). No mention of portfolio rebalancing at no cost. In this case, there will not be a major saving but the Hybrid SIPP is an insured contract which creates far less admin.

Would stakeholder still be better in you opinion? I mean in thirty years I will have at least 30 different funds...or so I hope.

I'm not a big fan of stakeholder pensions now. Sure, they have their place and I still use them from time to time but if you can invest in a personal pension and use stakeholder funds and maybe the occassional PPP fund, then it seems daft to use a stakeholder. A PPP has no initial charges and that just leaves you looking at the AMCs. With fund based discounts on PPPs, you can find that some PPP providers will be cheaper than SIPPs for like for like funds.

Also could you possibly let me know which PPP has an amc that is less than 1% for these type of funds? (from earlier posts, I suspect it would be Skandia, though I couldn't find their charges on their site). That's incredibly low.SA

Not Skandia but Scottish Life. It has a 1% before fund based discounts giving a reduction in yield from 7% to 5.9% (which is normal for 1% contracts). Max fund based discount is 0.25%. This is the Inv Perp UK equity fund.

EdInvestor

To be honest there's not much advantage to be gained from buying conventional funds with AMCs of 1.5% or so in a SIPP, that's not what SIPPS are for.You are still going to get stung for 30% of your fund value over 25 years if you do that.

The big advantage in using a SIPP is that you can buy shares, thereby cutting costs to virtually nothing, if you operate on a long term buy and hold basis and reinvest your dividends occasionally - or just keep them in the cash account earning interest.

There is also an advantage in using a SIPP to invest in low cost trackers via the new I-shares,which have an annual charge as low as 0.3%. Since most pensions charge at least 1-1.5% as an annual fee, there's a useful saving there.It's a complete waste of money investing a conventional pension in a tracker IMHO.

moneytroll

Ed, you mean that in my case a personal pension is definitely a better choice? But as I want to stay more in control of the funds I buy, I read that SIPPs are precisely designed for that (for more proactive investors, which doesn't have to go as far as buying individual shares..).

I don't mind paying higher charges for good quality funds (than lower charges on trackers, which aren't as much fun somehow). It would be good to read some stats on long-term performances of trackers vs funds and see how they compare, but right now I am just trying to decide on the right vehicle for retirement - and it's killing me (before i have even retired). Maybe I should see an IFA after all - it's all delicate matters..
what about shooping for annuities later on? don't sipps offer more flexibilities there than personal pensions?

moneytroll

EdInvestor wrote:

You are still going to get stung for 30% of your fund value over 25 years

how does that work? the fund value would've gone up then surely? (well, "surely" is the wrong word)

moneytroll

dunstonh wrote:

Not Skandia but Scottish Life. It has a 1% before fund based discounts giving a reduction in yield from 7% to 5.9% (which is normal for 1% contracts). Max fund based discount is 0.25%. This is the Inv Perp UK equity fund.

Btw, I just compared the funds and now there's more confusion. The Inv Perp UK Equity fund from Scottish Life's PPP differs from the one I mentioned from HL (Inv Per UK Equity Pension Fund: https://www.hargreaveslansdown.co.uk/siteredesign/fund_facts/ff_glance.asp?fund_id=5410). It even has a completely different manager, Burke as opposed to Woodford. But on HL's site, Burke is managing Inv Perp UK Aggressive...

On the Inv Perp Equity fund fact sheet from Scottish life, there's also an amc mentioned of 1.6% and on their "additional fund charges" sheet, there's another 0.6%. How did you worked out 0.25%? Are there some discounts mentioned that I haven't seen?

Have also a feeling HL offers much more diversity in terms of funds you can have your SIPP in as opposed to Scottish Life.

I am very annoyed about the way the charges are published. It differs from one company to another severely. There should be a more universal way of presenting them. The annual total expense ratio for example often works out much higher (because of some bizzar miscellaneous other fund charges that are mentioned on a different sheet) and unless you want to become intimate friends with the calculator, it's really hard work to find out exactly how much you are charged. :mad:

As Tolstoy said: "There is no greatness where there is no simplicity.."

dunstonh

But as I want to stay more in control of the funds I buy, I read that SIPPs are precisely designed for that (for more proactive investors, which doesn't have to go as far as buying individual shares..).

PPPs can switch funds just as easily as SIPPs. I think a lot of the articles you may have read compare modern SIPPs against legacy Personal Pensions. The media has overstated the benefits of SIPPs and made them out to be the best thing ever. Whilst they are very good, to many the benefits are not going to be used and they are better off in a stakeholder/personal pension.

I don't mind paying higher charges for good quality funds (than lower charges on trackers, which aren't as much fun somehow).

That is a good approach to take IMO.

what about shooping for annuities later on? don't sipps offer more flexibilities there than personal pensions?

If you need to switch to a SIPP at a later date, then modern pensions offer no transfer penalty so its not a problem. Indeed, many providers are setting their post 6th April 2006 pensions to allow you to switch at no cost between their pension versions (some are not including stakeholder).

how does that work? the fund value would've gone up then surely? (well, "surely" is the wrong word)

Ed thinks that you shouldnt pay any charges for anything. Whereas I would look at the annual management charge on an annual basis against performance for that year, Ed looks at the 30 years of 1% or whatever and then deducts it all in one go.

You can choose how you view that. I think its daft because everything has a profit margin and costs. My shopping bill could be 20% lower if I didnt pay for profit. Over 30 years, that 20% would add up to a lot. A lot more than a 1% annual management charge.

EdInvestor

Moneytroll

For charges and their effect see the FSA site:

www.fsa.gov.uk/tables


Just to give an example, the return on share investments is forecast going forward to be around 8.5% - made up of inflation, economic growth and the market dividend yield. You are usually quoted a 7% return ,net of 1.5% in charges.

Now if you saved 200 quid a month into a fund for 25 years @ 8.5% average annual growth you would end up with a fund worth 197,387. But at 7% growth you would only get 157,494.

So that 1.5% charge will cost you 40,000 quid over 25 years. I don't think that's either negligible or reasonable, and I suspect most people have no idea how much they are actually going to be paying with a charge of 1.5%.

<Fund reference deleted by Pal>

I suggest you take a look at the HL Sipp if you plan on making regular contributions into funds.If you want to do income drawdown at retirement you'll be wanting to move to a Sipp anyway, so may as well do it now.

dunstonh

<Fund reference deleted by Pal>

Are you making fund recommendations now? That fund is a different risk profile to the one selected by moneytroll. Have you done a personal risk analysis on moneytroll to allow you to recommend a lower risk fund than he initially selected?

So that 1.5% charge will cost you 40,000 quid over 25 years. I don't think that's either negligible or reasonable, and I suspect most people have no idea how much they are actually going to be paying with a charge of 1.5%.

If you expect to get these things for free, then go live in China. Even there communism is failing, so that wont be much use for you.

If you spend £200 a week at Tesco, then around 12% of it is charges (profit). Over 25 years the effect of those charges is £84,460.23.

Will that stop you buying food when you can go set up a veg patch in the garden much cheaper?