How do government contributions work in practice (SIPP)

jonny2510

I'm currently investigation opening a SIPP to save towards my pension.

I understand as a basic rate tax payer for every £80 I contribute, the govenment will "top this up" by £20.

So, if I pay £80 into my SIPP, and then invest in a Worldwide Equities Super Investment Fund (;)), will the £20 appear:

a) as soon as I transfer the cash into the SIPP
b) as soon as I make the share/fund purchase
c) later as cash amount in the SIPP account
d) later as an additional investment into whatever I purchased
e) something else.

The SIPP provider I'm looking at is likely to be Hargreaves Landsown at this point if that makes a difference.

atush

c i believe.

It happens around a month after (depending on the provider), and you can use it to buy further investments once there.

dunstonh

So, if I pay £80 into my SIPP, and then invest in a Worldwide Equities Super Investment Fund (), will the £20 appear:

a) as soon as I transfer the cash into the SIPP
b) as soon as I make the share/fund purchase
c) later as cash amount in the SIPP account
d) later as an additional investment into whatever I purchased
e) something else.

Depends on your pension provider. If they pre-fund the tax relief you get it straight away with the contributions being paid. If they dont pre-fund the tax relief it will around around 2 months later (typically around 6 weeks)

The SIPP provider I'm looking at is likely to be Hargreaves Landsown at this point if that makes a difference.

They dont pre-fund I believe.

Also, are you sure a SIPP is really the right choice? £80pm is a very small contribution and not really SIPP territory. At that level it could be an expensive folly.

jonny2510

dunstonh wrote: »

Also, are you sure a SIPP is really the right choice? £80pm is a very small contribution and not really SIPP territory. At that level it could be an expensive folly.

Thanks for the replies (and extra information re. Hargreaves Lansdown).

As for the monthly contribution, it's going to be more than that. I just used £80 as a simple example.

Do you mind if I ask what level (of either balance and/or monthly contribution) you would call SIPP territory?

dunstonh

Do you mind if I ask what level (of either balance and/or monthly contribution) you would call SIPP territory?

£10k plus and if you specifically want to invest in a type of investment that is not available on a PPP. Until you get to around £8000, the difference in returns has very little impact on the value.

If you are going to go into one of the HL MM funds or a similar bog standard fund then these are usually more cost effective on a personal pension (e.g. a balanced managed fund on a PPP can be around 0.4% p.a. but on the HL SIPP can be 2.3%)

sandsy

Ask yourself a question: what is the difference between an ordinary personal pension and a SIPP?
If you can't answer it, you should be asking yourself another question: why are you considering a SIPP?

zagfles

HL give you the choice of c and d. You get the choice when topping up your SIPP. You get the tax relief about 6 weeks later as stated above.

I don't see why there should a minimum amount to invest per month before it becomes worthwhile to use a SIPP - especially if you invest in funds, as there is no flat fee with HL, just the usual % AMC of the funds. There are flat fees when you take the income but they are pretty insignificant unless you've only been paying in a few years.

dunstonh

I don't see why there should a minimum amount to invest per month before it becomes worthwhile to use a SIPP - especially if you invest in funds, as there is no flat fee with HL, just the usual % AMC of the funds. There are flat fees when you take the income but they are pretty insignificant unless you've only been paying in a few years.

Its a cost issue. The vast majority of HL's funds are two, three or four times more expensive than those available on a personal pension and stakeholder pension.

So, if you know that actual investment returns themselves are not going to make a great deal of difference on a regular contribution plan until it gets to a certain value, then why pay any more than you need to?

Over 9 years - £100pm (8 years as Jup Merlin has only been running for just over 9 years so couldnt do 10 - so selected 9 to ensure like for like)
HL MM Balanced trust £13,325
Jupiter Merlin Balanced Port £15,112
Aviva Balanced Managed £14,339
(source: FinEx analytics)

If you plot all three on a graph together there is nothing in it in the early years. It is around £8000 upwards that it begins to start to change. The Aviva fund is actually being handicapped in the example as it is assuming 1% AMC. Whereas if you are comparing DIY, the you could knock that down to around 0.5%. With HL, they keep the platform commission and the IFA commission for themselves and dont refund it. Jupiter is 2.36% p.a. HL is 1.82% p.a.

So, as much as it may be unfashionable to have a stakeholder pension or a personal pension, it can still be the most suitable option with small values. It may not have returned as much as the Jupiter but it was until around £8000 and was holding its own with others to that point.

Example 2 but making it £100pm over 9 years with a starting value of £20,000 then you get a noticeable difference:
HL MM Balanced trust £48,243
Jupiter Merlin Balanced Port £60,884
Aviva Balanced Managed £52,694

See how the gaps are starting to open up more and paying more for quality can beat the cheap but basic (or the expensive but basic in case of one of the funds that happens to be sold a lot on that platform)

zagfles

dunstonh wrote: »

Its a cost issue. The vast majority of HL's funds are two, three or four times more expensive than those available on a personal pension and stakeholder pension.

Yes, but the point of a SIPP is to choose the best funds... as you say below...

So, if you know that actual investment returns themselves are not going to make a great deal of difference on a regular contribution plan until it gets to a certain value, then why pay any more than you need to?

What do you mean by that? Both the charges and the investment return will be a % of the investment, so they are both equally significant whatever the size of the investment. The size of the investment only makes a difference if there are flat fees, not % fees.

Over 9 years - £100pm (8 years as Jup Merlin has only been running for just over 9 years so couldnt do 10 - so selected 9 to ensure like for like)
HL MM Balanced trust £13,325
Jupiter Merlin Balanced Port £15,112
Aviva Balanced Managed £14,339
(source: FinEx analytics)

If you plot all three on a graph together there is nothing in it in the early years. It is around £8000 upwards that it begins to start to change. The Aviva fund is actually being handicapped in the example as it is assuming 1% AMC. Whereas if you are comparing DIY, the you could knock that down to around 0.5%. With HL, they keep the platform commission and the IFA commission for themselves and dont refund it. Jupiter is 2.36% p.a. HL is 1.82% p.a.

So, as much as it may be unfashionable to have a stakeholder pension or a personal pension, it can still be the most suitable option with small values. It may not have returned as much as the Jupiter but it was until around £8000 and was holding its own with others to that point.

Example 2 but making it £100pm over 9 years with a starting value of £20,000 then you get a noticeable difference:
HL MM Balanced trust £48,243
Jupiter Merlin Balanced Port £60,884
Aviva Balanced Managed £52,694

See how the gaps are starting to open up more and paying more for quality can beat the cheap but basic (or the expensive but basic in case of one of the funds that happens to be sold a lot on that platform)

But that just shows that if you put in more early, the performance differences show up more. That's fairly obvious. It's nothing to do with the size of the investment at all, it's to do with putting proportionally more in earlier.

jonny2510

Many thanks for the replies with this.

I fear I may have thrown you dunstonh by mentioning a "Worldwide Equities Super Investment Fund".

I'm specifically interested in low-cost index tracking (one of the new Vanguard LifeStrategy funds).

For my circumstances HL seem to be the cheapest way of doing this (i.e. for now, only wanting to invest in the above) it would cost me £24 per annum in annual fees at HL, and then a TER of approx 0.32% for the fund. Obviously as time goes on, and more is invested the overall costs would reduce.

Do the PPPs that you mentioned offer low cost index trackers, and at comparable rates (I ask this as I'm genuinely interested, wondering whether to look into them further, and not to be argumentative).