Cheapest Sipp: build yourself a low cost DIY pension article

NeilW

whambamboo wrote:

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

EdInvestor wrote:

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_2

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

newby52 wrote:

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.

dunstonh

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

As has been pointed out before, £3600 is lowest value you can get with PR in drawdown. It would be pointless doing it though for less than say £25k in total.

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.

or
c) go with a fund supermarket pension that does allow drawdown with PR and utilise unit trust funds (which is what most do anyway inside a SIPP).

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.

What obsolete products are those?