How big is the '1.5%' Annual Charge over time?

darkvader

Good evening,

I have gone through quite a few threads and tried my hand at a few calculators but dont seem to get to the right answer. Then there is the part of some providers charging higher fees once your pension balance crosses X amount coupled with Annual Fund Charges on top

So, I'd really like to get a view on how the charges add up over time for the below plan I have to save for retirement

1. SIPP - Begin with £250 per month increasing by 20% every year for the next 30 years till I retire. Investments self made for now until I am 10 years to retirement and depending on the size of my portfolio
2. So if a SIPP provider states 'Annual Admin charge of 1% of the investment' which is on top of individual fund charges (ranging from 1 to 1.75%), a 1% charge on, say, my pot of £500k comes to £5000 a year - is this really true?
3. If yes, then i am right in assuming there is no way of avoiding this?
4. I believe such a cost will not be there for S&S ISAs (assuming bundled platforms only as we have no clue how charges will apply once unbundled)
5. Finally, I have read of the 55% tax on amounts ABOVE £500k - so I am right in saying its only that portion that's above 500k will be taxed IF I want to withdraw the entire SIPP before state retirement age?
6. As I continue to put about £500 into my S&S ISA non stop for the next 15 years - is there ANY sort of charges from unbundled platforms? I accept this may be ambiguous given there are so many platforms so putting it another way, which platform TODAY would be best in terms of charges for S&S ISA (everything else being redundant)?

Sorry for asking so much on a Friday but I'd like to get things sorted this weekend before I open my SIPP with H&L (BTW - any alternatives to H&L purely in terms of charges will also be appreciated as I will always pick my own funds and plan my own journey over the next 20/30 years)

Thanks a mil
DV

dunstonh

2. So if a SIPP provider states 'Annual Admin charge of 1% of the investment' which is on top of individual fund charges (ranging from 1 to 1.75%), a 1% charge on, say, my pot of £500k comes to £5000 a year - is this really true?

That makes it an expensive SIPP. The ideal scenario (at this point) is either unbundled charging where you pay the retail AMC and nothing else or you pay a platform charge (and IFA charge where applicable) and get the platform commission and IFA commission rebated. Typically, the 1.5% is the bottom line. Not 1.5% plus 1%.

3. If yes, then i am right in assuming there is no way of avoiding this?

Yes. Use a cheaper provider.

4. I believe such a cost will not be there for S&S ISAs (assuming bundled platforms only as we have no clue how charges will apply once unbundled)

There are enough bundled or unbundled platforms available now where there is no cost difference between the wrappers.

5. Finally, I have read of the 55% tax on amounts ABOVE £500k - so I am right in saying its only that portion that's above 500k will be taxed IF I want to withdraw the entire SIPP before state retirement age?

1 - you cannot withdraw the entire SIPP unless you are referring to flexible drawdown
2 -the lifetime allowance is £1.5 million (from next year) and fixed for a while but expected to rise in future budgets once economy and anti high earner sentiments have died down.
3 - You can only take benefits on pensions after age 55

6. As I continue to put about £500 into my S&S ISA non stop for the next 15 years - is there ANY sort of charges from unbundled platforms? I accept this may be ambiguous given there are so many platforms so putting it another way, which platform TODAY would be best in terms of charges for S&S ISA (everything else being redundant)?

unbundled charges will have charges. That is the whole point. They do not accept commissions and they rebate them and charge you explicitly instead.

Sorry for asking so much on a Friday but I'd like to get things sorted this weekend before I open my SIPP with H&L (BTW - any alternatives to H&L purely in terms of charges will also be appreciated as I will always pick my own funds and plan my own journey over the next 20/30 years)

HL is a bundled platform. They keep the IFA commission of 0.5% and the platform commission (which varies with funds) of around 0.25%. So, around 0.75% of the 1.5% AMC is going to HL.

SallyG

http://www.ft.com/cms/s/2/f70e4428-e4f8-11e0-9aa8-00144feabdc0.html#axzz1YnxcfYjo

darkvader

Thank you dunstoh, sort of knew you would be the first one to reply :-)

Let' say unbundled platforms are now in the picture, there are no rebates and so the only reason is go with a platform is to have all your holdings in one place and under one view - from that point on, without ANY savings on initial investments, doesnt an upfront initial charge varying from 1% to 5% over 30 years also add up to a really large amount?
So if I were to invest £10k a year over 20 years amounting to £200k, an average initial charge of say 3% all the way amounts to £6000 in total which is quite high - though I must admit its a lot lesser than just paying an annual 'Administration Charge'

I accept there are many choices, but given my scenario, is going with one of the current providers (H&L, Fidelity, Cofunds etc) the best choice for a SIPP? My ISA, as I was quite a novice to this at the start of the FY, is Fidelity - they have good discounts but not as good as H&L nor the diversity of Funds (although I have managed to pick a decent portfolio with no higher than 1.25 % AMC)

Thanks again
DV

Ilya_Ilyich

Upfront charges are simply a flat reduction in your ultimate pension pot size. A charge of 3% now will result in a 3% lower pension pot at retirement. So if over the years your pot would grow to £500k with no initial charge, if your investments have a 3% initial then it'd grow to £485k instead. Based on this calculator as I'm too lazy to spreadsheet it atm a 1.25% AMC over £30 years, with constant contributions, would result in around an 18% lower pension pot compared to a 0.25% AMC (eg a tracker fund getting similar returns) and 22% lower than if there'd been no charge at all. Assumes 7% growth.

dunstonh

Let' say unbundled platforms are now in the picture, there are no rebates and so the only reason is go with a platform is to have all your holdings in one place and under one view - from that point on, without ANY savings on initial investments, doesnt an upfront initial charge varying from 1% to 5% over 30 years also add up to a really large amount?

Up front charges are rather old fashioned nowadays. Apart from any advice fee, the actual purchase itself should really be free of any up front charges (ignoring trading charges for quoted stocks and dilution levies and bid/offer spreads). There is no reason to pay 5% charges anymore for 30 odd years.

So if I were to invest £10k a year over 20 years amounting to £200k, an average initial charge of say 3% all the way amounts to £6000 in total which is quite high - though I must admit its a lot lesser than just paying an annual 'Administration Charge'

If that was an advised case you would be looking to pay probably no more than £1000 on initial fees due to advice and nothing on the investments themselves. If you are paying 3% initial for 30 years then you need to change how you are purchasing it.

I accept there are many choices, but given my scenario, is going with one of the current providers (H&L, Fidelity, Cofunds etc) the best choice for a SIPP?

Depends on what assets you want. Self balancing portfolio funds can actually still be much better value on stakeholder pensions and personal pensions. SIPPs give you greater choice but remember that if you are using unit trusts, you must compare the TER with a pension fund AMC (pension funds are quoted with the TER being the AMC). If you are going to build portfolios then that is when the SIPP comes into play. What assets do you want?

darkvader

My asset plans for now are confined to
1. 45% to Emerging markets
2. 15% To Energy sources
3. 15% to Mining and Resources
4. 15% to Global Bonds just to keep the ship steady....
5. and finally a sector most tend to ignore but about 10% to infrastructure.....

My Company pension is geared to this formula...and what I want from my own SIPP is somethin similar but I am still in the planning phase of things...any advise to the contrary will be much appreciated...note that I tend to balance my portfolio with some sound investments.....so property, bonds and gilts is something I am considering....

DV

fairleads

The 1.5% annual charge reduces the value of your retirement pot by close to 25%. Put another way, your retirement pot would be 32% bigger if there were no 1.5% annual charge.
Further,if, on retirement, you choose the drawdown option then on the demise of the survivor, HMRC will take a 55% cut from the residue of the fund. The remaining 45% will be included in the estate and distributed to the heirs. Another lesser puplicised piece of info is that your surviving spouse /partner's income could, assuming they also have a separate income stream, place them in a higher tax bracket because the total joint income now accrues to one person. Taking a lower drawdown only delays the inevitable tax hit and - because a lower drawdown leads to an ever increasing fund value -the fund managers/ advisers take even more in costs/fees.