Sipp vs Stakeholder vs PP

wading_through_treacle

Hi,

I'm 32 years old and have an old employee pension with a total pot of about £12.5k, held in a Stakeholder with Phoenix Life (formerly Scottish Mutual). I haven't made any contributions to it for bout 7 years, apart from my opted-out SERPS contributions, which have steadily been going into the protected rights portion of it, and am belatedly trying to work out what's best to do.

It's 1% AMC and 100% transfer value with no exit fees, so that's all fine. However, the funds I can invest in are poorly performing (and always have from the research I've done) and I also have a 5% bid-offer spread on any new contributions I make: so although the AMC isn't too bad, I think I'm basically losing 5% of any new payments?

I realise there is a big debate on here about SIPPs vs Personal Pensions, and I realise that my pot is smaller than usually recommended for a SIPP. However, I will be looking to bump it up quite a bit over the next few years, mainly by lump sum additions of hopefully £2-3k a couple of times a year. This is why the 5% bid-offer spread seems quite steep to me.

I will be unlikely to invest directly in shares but I would like a wide choice of funds. I know I can get a decent PP with an AMC of about 0.8% (maybe slightly less) directly but I'm finding it frustratingly hard to find out whether they also have a % bid-offer spread. I understand that if I go through an IFA I can probably get the AMC down even further and I will also have access to a wider range of PPs than doing things directly but (a) if I pay ~£500 to an IFA that's effectively 4% of my current pension pot, and (b) I'm happy making the decisions myself - a lot of my experience with IFAs with mortgages and in the past hasn't been fantastically useful. With the PPs I can access directly the choice of funds is also usually still fairly limited, although better than I have at the moment.

I've looked at the various SIPPs and, for example, if I went with Hargreaves Lansdowne, then provided I stuck to funds where they discount the whole initial charge and provide enough of a discount to get the AMC for those funds to 1% or less then that seems to me like I'd be better off going with this than a straight PP?

I'd be very grateful for any advice that anyone can offer - I've been goign round in circles for about a week now and I know I should really just be getting on with it!

Many thanks,

WTT

purch

provided I stuck to funds where they discount the whole initial charge and provide enough of a discount to get the AMC for those funds to 1% or less then that seems to me like I'd be better off going with this than a straight PP?

HL do not discount the AMC or rebate any of the trail on funds held in a SIPP wrapper.

dunstonh

I also have a 5% bid-offer spread on any new contributions I make:

That is not possible.

so although the AMC isn't too bad, I think I'm basically losing 5% of any new payments?

As its not possible then its not happening. Also, with pension funds, the AMC quoted is the TER. Note that for the moment....

if I pay ~£500 to an IFA that's effectively 4% of my current pension pot

But if the IFA option saves you £50 a year (based on current value) then its a better longer term option.

a lot of my experience with IFAs with mortgages and in the past hasn't been fantastically useful.

most IFAs dont do mortgages. Mortgage advisers do mortgages.

I've looked at the various SIPPs and, for example, if I went with Hargreaves Lansdowne, then provided I stuck to funds where they discount the whole initial charge and provide enough of a discount to get the AMC for those funds to 1% or less then that seems to me like I'd be better off going with this than a straight PP?

As Purch says, there is no discount on the AMC with HL. Plus, the funds they offer show the TER and AMC differently. So, remember to compare the pension funds AMC against the TER of the unit trust/oeic funds.

HL may be fine for you but you are making some incorrect assumptions.

jamesd

On £12,500 with managed funds you'd be paying Hargreaves Lansdown 0.5% trail commission that costs you £62.50 a year. Plus more on any growth or new money. Buying with a fee from an IFA would eliminate that 0.5% ongoing cost. It would also avoid all or most of any initial charge. Depending on the platform used there might be a 0.25% or so charge to switch from one fund to another, check with the IFA.

If you want simple trackers a FTSE tracker at 0.27% annual charge is available but that sort of tracker is also available more cheaply in some alternatives sold by IFAs.

Since you're going to stick with funds it doesn't seem worthwhile for you to use Hargreaves Lansdown at your age and with your future contribution plans.

Hargreaves Lansdown does pay some of the 0.5% into their Loyalty bonus fund in their S&S ISA but this doesn't apply to their SIPP.

HL is excellent for ease of access, convenience and a decent selection of investment types, but lowest cost for funds only in a pension isn't one of the places where it fits.

wading_through_treacle

Hi all,

Many thanks for your responses - I really appreciate it. If possible, I'd just like to clear a couple of things up?

@purch - when you say that HL don't discount the AMC on any funds, I think I must be misunderstanding their pricing. Apparently as a new user I can't post links on here, but if you go to h-l.co.uk/funds, choose a sector or company and then click on the 'Discounts, Savings and Charges' tab, they seem to show small discounts to the AMC for many funds. Does this refer to something else aside from the AMC?

@dunstonh - obviously I realise you know much more about this than me, but when I rang and spoke to Phoenix Life, I asked what charges applied and they said that there was a 1% annual charge. I asked if that was it and they said that a 5% bid-offer spread also applied. I didn't have any idea at all what this meant at the time and so I asked the lady to clarify what she meant. She said that it amounted to a 5% charge on any payments made. I asked her to repeat that again because it sounded crazy but she seemed firm that's what it was. Looks like I need to call them back again and check that with someone else.

@jamesd - can you quickly explain at what point HL would take that 0.5%? I can't find any mention of it in either the fund or wrapper charge details on their website?

I absolutely take the point that it's worth paying an up-front fee to an IFA if it works out better in the long term, I suppose I just wanted to be sure that through an IFA I would be able to get a PP/Stakeholder that gives me the flexibility (lots of choice of funds now and easy changes in the future without going through the IFA) that I'm looking for. If you're all confident that's the way to go, then I'll go find myself an IFA...

Many thanks once again,

WTT

dunstonh

when I rang and spoke to Phoenix Life, I asked what charges applied and they said that there was a 1% annual charge.

That is fine. Stakeholder pensions have a 1% amc cap (exception of first 10 years but most dont enforce that).

they said that a 5% bid-offer spread also applied.

Stakeholder pensions are not allowed bid/offer spreads or initial charges. So, if its a stakeholder pension, you have been given duff information.

She said that it amounted to a 5% charge on any payments made. I asked her to repeat that again because it sounded crazy but she seemed firm that's what it was.

Some personal pensions have intiail charges (on contribution) but much lower annual charges. Getting the charge out the way at the start can be more cost effective in the long term.

@jamesd - can you quickly explain at what point HL would take that 0.5%? I can't find any mention of it in either the fund or wrapper charge details on their website?

They get paid the trail commission on the funds which is paid to the servicing IFA. They also get paid the platform cut as well but you dont need to worry about that yet. If an annual management charge is 1.5% (typical amc for a unit trust) then 0.5% of that gets paid to the agent.

If you're all confident that's the way to go, then I'll go find myself an IFA...

There are certianly providers that do this (Skandia being a popular one - and they offer the blackrock trackers which are the best UT tracker funds in the UK). Plus, the IFA can choose to rebate the trail commission which HL are keeping. However, the IFA has to be paid somewhere. With execution only that usually means up front. Or a part trail rebate (i.e. 0.25% taken with anything above that rebated or things like that).

jamesd

The fund takes the money and reduces its performance accordingly. The money is then paid to HL each month. If you have their ISA or fund account you'll see some of the money show up in your Loyalty Bonus account as well.

Here's how they report that the loyalty bonus doesn't apply in the SIPP on one of the fund pages:

"Annual saving 0.250% ²

² Annual saving is not available in the SIPP."

So there HL is probably sharing about half of the normal trail commission except in their SIPP. They also get a bit more for the platform commission that's not paid to IFAs normally but to fund platform operators like Fidelity. HL runs its own platform so gets that.

A little lower down you'll see the Total Expense Ratio. That's the annual charge plus some more costs the fund has. The fund performance is reduced by this rather than the annual charge, and also is reduced by assorted other charges that doesn't show up in the TER. Pension funds, as distinct from unit trusts like that one that can be held in a SIPP or personal pension, tend to have an AMC that's more inclusive of these extra costs. But that saving isn't significant if the performance is lower and the performance is where all things show up.

wading_through_treacle

Many thanks all for your replies - I've definitely got a much clearer understanding now.

@dunstonh - I rang Phoenix Life again this morning and my pension is not a stakeholder, just an ordinary PP, so that explains my bid-offer spread confusion. Thanks for clearing that up for me.

@jamesd - thanks for explaining that so clearly. From looking at the skandia list of funds, it looks like for most funds my TER will be a fair bit lower going that route rather than with a SIPP and I still have a decent choice of funds available to me.

I have to say, I still find it frustrating that for many (most?) PPs you can't go direct but maybe that's just me.

Thanks once again for the clear (and very quick!) explanations.

WTT

dunstonh

I have to say, I still find it frustrating that for many (most?) PPs you can't go direct but maybe that's just me.

The retail distribution for financial products is not dissimilar to other retail areas. You dont buy baked beans direct from Heinz. You get them from your supermarket.

If a company chooses to retail direct to public it increases their cost of regulation and solvency requirements. It also requires a whole load of staff to ensure it complies with FSA regulation. Those costs mean that the companies that sell direct often do so at full retail price or more expensive than using an IFA. Other companies dont think they will have the volume to cover the costs.

Some of the worst stakeholder pensions you can get are sold direct to public (Virgin Stakeholder for example or most of the supermarket versions which are cut down versions of the IFA product from the associated insurance company).

@dunstonh - I rang Phoenix Life again this morning and my pension is not a stakeholder, just an ordinary PP, so that explains my bid-offer spread confusion. Thanks for clearing that up for me.

That explains it. Have you checked to see if there are any guaranteed annuity rates on the plan? Some of these older plans are expensive but have valuable guarantees.

wading_through_treacle

@dunstonh - I figured it would be to do with regulation. Not sure your baked bean analogy holds though! Supermarkets exist to provide a huge range of related products direct to the consumer. An equivalent would be an online aggregator, I suppose. IFAs are like being able to read all the reviews of different types of beans and see which brands contain how many calories, making your decision as to which beans you want but then having to pay someone in the supermarket before being able to walk out with them!

I did check on the guaranteed annuity rates as well, and there's nothing like that and no other benefits either: I assume you would agree that I'm definitely best off changing to another policy?

In light of all the advice above and other advice I've read online, I think I'm looking at getting the Skandia PP through an IFA unless anyone has any other tips?

Many thanks.

dunstonh

Supermarkets exist to provide a huge range of related products direct to the consumer. An equivalent would be an online aggregator, I suppose. IFAs are like being able to read all the reviews of different types of beans and see which brands contain how many calories, making your decision as to which beans you want but then having to pay someone in the supermarket before being able to walk out with them!

IFAs have access to a massive range. With advice, they can redcuce the options and hand hold but without the advice, the IFA becomes a retailer in the same way as a supermarket. Many feel that over the long term, IFAs will split between retailers without advice or those with. At the moment you are some way between the two with most.

I did check on the guaranteed annuity rates as well, and there's nothing like that and no other benefits either: I assume you would agree that I'm definitely best off changing to another policy?

With those charges and no other contractual benefit on the existing plan, there seems little point keeping it.