How to calculate cost/benefit of pension transfer?

pambolton

Aged 50 now and I haven't made any payments into a pension for over 10 years. Wont be auto enrolled by my work into a new pension until February 2017 and even then they will only be making the smallest possible contribution.

Have now paid off the mortgage so I want to start paying 750 (maybe more ) net per month by salary sacrifice so am planing on taking out a Low Cost SIPP, selecting one based on the costs and the range of passive funds available (so probably Fidelity, Hargreaves or Best I think).

I wont be buying shares I just want to invest in FTSE 100/250 trackers and perhaps other similar passive funds. But maybe in the years to come will get more adventurous.

I have a Prudential stakeholder pension with £35k all invested in the "Prudential UK Equity Passive S3". It is the only tracker fund they offer I beleive.

I am wondering if I should leave my £35k in the Pru Stakeholder (1% annual charge) or move it to the new pension. I understand it is priced as a "Swinging Single Price".

My question is - what would I need to consider to make a sound choice of whether to leave the Pru Pension as it is or move it into the new pension?

Thanks for any advice

Pam

bigadaj

You've got the right ideas so the main concerns are cost and investment choice.

Have a read on the monevator website for some good background, though passive biased, and there's also a table of costs and charges for many of the big providers.

What you select in a pension now is basically the same as you might hold in an is a or unwrapped, just a difference in the tax treatment.

Passive or active funds is a personal choice, I'm passive biased but you can't access all markets that way or certainly not in the best way so I hold a mixture of passive and active.

I hold a small sipp with bestinvest and they are fine and lowest cost for small sums. Hl are more expensive but have more tools and many are happy with its their customer support.

The crossover in cost between fixed fee and percentage charging seems to occur for most people at the £30-40k mark, so it could be worth transferring your old pension to a fixed fee provider and adding to it with your new contributions, though there will be trading costs then, just a case of doing the sums.

You say you want to do this by salary sacrifice but this would need to be done by your employer.

Also you say you want a tracker which is fine, however you want a world tracker, or one that tracks many regions, don't go uk only. The ftse 100 has been one of the worst performing major stockmarkets for some years now, exposure to the US and elsewhere is important.

pambolton

Thanks for that tip. I now see why the "Prudential UK Equity Passive S3" fund is classed as high risk so that now makes sense. Feel a bit exposed on that and no other passive funds in the Pru Stakeholder.

Is very reassuring to hear I am on roughly the right track. Could you say any more about how to go about doing the sums. I had imagined it was a case of calculating the difference between the bid offer spread and adding in any exit charges (which I can't yet find on the Pru website but imagine they are there). However I now read it is a "Swinging Single Price" fund.

Pam

dunstonh

I now see why the "Prudential UK Equity Passive S3" fund is classed as high risk so that now makes sense.

its high risk when it is by itself. When part of a portfolio of funds which covers the other sectors then the overall risk would be reduced.

Feel a bit exposed on that and no other passive funds in the Pru Stakeholder.

Stakeholder pensions are largely obsolete nowadays. They cater for a niche at the bottom end of the market. A basic product really.

I just want to invest in FTSE 100/250 trackers

That would be bad quality investing for the reasons already mentioned.

I had imagined it was a case of calculating the difference between the bid offer spread and adding in any exit charges (which I can't yet find on the Pru website but imagine they are there).

Stakeholder pensions have to be mono charged by design. So, you are looking for charges that dont apply to it.

pambolton

Thanks for that. I am keen now to get a pension that has more funds, so I can spread the risk and start also start contributing again.

I assume "mono charged" is the 1% that is taken annually. Therefore am I right in assuming that I won't loose anything by transferring out of the Pru Stakeholder and into a low-cost SIPP?

So it is all upside if there is a better range of funds and also lower charges?

dunstonh

I assume "mono charged" is the 1% that is taken annually. Therefore am I right in assuming that I won't loose anything by transferring out of the Pru Stakeholder and into a low-cost SIPP?

You wont lose charges on transfer.

So it is all upside if there is a better range of funds and also lower charges?

Dont assume lower charges. With SIPPs you have the SIPP charges and then the fund charges. The fund charges can be low but they can be high. They can also suffer bid/offer spreads. You also get lower FSCS protection (which may or may not concern you).

SIPPs are more popular on the DIY side because of lower consumer protection. If you know what you are doing then that is fine. However, you need to be more on the ball with a SIPP than a stakeholder pension or a PPP.

bigadaj

pambolton wrote: »

Thanks for that. I am keen now to get a pension that has more funds, so I can spread the risk and start also start contributing again.

I assume "mono charged" is the 1% that is taken annually. Therefore am I right in assuming that I won't loose anything by transferring out of the Pru Stakeholder and into a low-cost SIPP?

So it is all upside if there is a better range of funds and also lower charges?

Yes, but if you start to get exotic in your fund choices the costs can add up. With easy tracker style self managing rebalancing funds you're looking at costs around 0.5%, lower if you're prepared to make your own portfolio and rebalance and monitor yourself. Also could be a lot less with a fixed fee provider once your total pot gets into say six figures.

just make sure you have a diversified package of funds and you are aware of your risk tolerance, which then match your selections. The last thing you want is to panic after a crash, and go to cash or equivalent crystallising your losses rather than waiting out the storm and coming out ahead in a Couple of years.

pambolton

Thanks both for pointing these considerations out, which are very very helpful.

Re protection I see from previous posts that It is the underlying asset within the SIPP that matters and Unit Trust/OEICs get investment FSCS protection so looks like I will be OK if I start out with funds.

I take the hint that I need to choose the funds with care looking at the charging etc.

After looking at the Lang Cat Tables and assuming my investment pot will be increasing from £35k at say £1000/month Best Invest looks like the cheapest but reviews seem to say Hargreaves Landsdown are more expensive but have the best customer service and research tools for inexperienced investors. They also have a discounted fund "Legal & General International Index Trust" with low charges (0,08% ??) and global exposure. Plus would need a Uk tracker.

So at the moment my idea is to go with HL SIPP and transfer my £35k + £650 per month by salary sacrifice which with NI and tax savings seems to gross up to about £850 added to the pot.

Would never have got this far without the kind advice you have given, want to gingerly ask if I am still on the right track??

bigadaj

Hl are expensive but the difference isn't huge, on say £50k pot then it's probably an extra £100 per year.

The vanguard lifestrategy funds are popular, they are more expensive at around 0.23% but rebalance automatically which saves some effort and worry. I've got the vls80 in both sipp and isa, and checked earlier on trustnet, over 1 and 3 years it's ranking 5th out of over 100 funds in the 40-85% equity sector.

pambolton

Thanks - got my form off to HL today!