Investing more in SIPP vs S&S ISA

dunstonh

- So £100K in the pension pot today will (or could realistically) grow to £400K in 20 years without being added to or managed by me? (That's using the 7% figure, which I understand is the upper estimate).

Yes. However, do be aware that £400k in 20 years time doesnt have the spending power of £400k today. So, you always need to be reviewing your target figure and increasing the contributions yearly to compensate.

You may have heard people over the years slag off pensions. A very common scenario is someone who started a pension of £30pm in the 80s thinking that would give them a big pension in retirement. £30pm was a big amount back then. A tank of petrol would be under a tenner. People were earning under £10k a year. However, they kept on paying £30pm. Not increasing it and when they finished and retired and paid their last £30, they decided at that point to look at the pension and were told it was not going to pay them well in retirement. They failed to take into account inflation and never compensated for the cost of living.

You need to increase the pension contributions annually to ensure you take into account the cost of inflation.

jdw2000

dunstonh wrote: »

Yes. However, do be aware that £400k in 20 years time doesnt have the spending power of £400k today. So, you always need to be reviewing your target figure and increasing the contributions yearly to compensate.

You may have heard people over the years slag off pensions. A very common scenario is someone who started a pension of £30pm in the 80s thinking that would give them a big pension in retirement. £30pm was a big amount back then. A tank of petrol would be under a tenner. People were earning under £10k a year. However, they kept on paying £30pm. Not increasing it and when they finished and retired and paid their last £30, they decided at that point to look at the pension and were told it was not going to pay them well in retirement. They failed to take into account inflation and never compensated for the cost of living.

You need to increase the pension contributions annually to ensure you take into account the cost of inflation.

Yes, that's very true in terms of the cost of living.

And on a slightly separate note, God only knows what type of property £400K will get you in 20 years time...

jdw2000

dunstonh wrote: »

ISAs and pensions have the same investments and the same charges (caveat that some pensions can offer internal funds cheaper than those available on ISAs. However you are talking SIPP rather than PPP so that is not an issue here). That means there is no difference in the two options other than the tax handling and the maturity process.



No. There are both tax wrappers but they have very distinct diferences.



That is one difference. However, there are several others. Pensions get tax relief on contributions. They are not part of your estate. Withdrawals are part liable to income tax. FSCS protection is higher on PPPs but the same as ISAs for SIPPs. Pensions reduce your income which can lead to child benefit being paid or tax credits being paid/increased. ISAs do not. PPPs have access to pension funds as well as UTs/OEICS/ITs etc. Pensions can get employer contributions (bypassing tax and NI). ISAs cannot.

I heard that SIPPs are the best types of pension. What's your take on that? I've no idea what the difference pros/cons are.

dunstonh

I heard that SIPPs are the best types of pension. What's your take on that?

Where did you hear that? It is wrong.

Generically, SIPPs are the most expensive option. They have lower FSCS protection and are aimed at the more experienced investor wanting access to more advanced investment options. In reality, things are little more blurred than that.

Some SIPPs have marketed themselves as low cost by focusing on the lowest cost investment options they can offer whilst ignoring the more expensive options that you can use. So, they can be cheap. But so can personal pensions. For example, I have a personal pension. Not a SIPP. It can do 0.23% p.a. all in (all charges). My firm arranges hundreds of pensions a year and the majority are personal pensions. A couple of stakeholder pensions and a fair few are SIPPs but they are a minority compared to PPP.

However, that is the advised side of things. We have more choice and options and have a regulator and ombudsman to think of. The DIY side seems to have totally focused on SIPPs. So, when you are going DIY, you are nearly always going to end up in a SIPP. I can't think of any DIY provider that uses a PPP instead of a SIPP. This is not because it is better for you. It is because it is better for the provider. SIPPs do not require the distributor to hold as much money in reserve as personal pension providers. Indeed, when a lot of them started, they hardly had to hold any money. SIPP provider failures were not uncommon. So, they use SIPPs because it was a cheaper option. There are cost pressures on SIPPs that are coming in the pipeline that will not affect PPPs as they already work to a higher level. So, expectation is it that SIPP charges will either have to rise or the providers will have to hit a level of efficiency that covers it (typically viewed as size of assets under management). Consolidation of SIPP providers is expected with smaller ones with low charges either expected to fail and be bought under administration or get bought before that stage. Indeed, some models do seem to exist purely to attract money under management which in turn will attract a buyer.

Looking at suitability.... With stakeholders, there is very little you can get wrong. Providers have to carry out due diligence on the investments (so do PPPs. SIPPs don't although there have been some FOS outcomes recently that have ruled against SIPP providers and they are not happy about it. These are under review as SIPP providers dont believe it is their remit). The funds available on a stakeholder are limited and you get a spread across the range. The only thing a person can get wrong is risk profile. Personal pensions offer a wider fund range but again there is less to go wrong. SIPPs can let all sorts of regulated and unregulated investments in. Virtually all the scams use SIPPs (although some have started moving to SSAS). The general rule is that you should invest within your scope of knowledge and understanding. Advisers are required to take that into account. The FOS would rule against an adviser using a SIPP if the person did not have the understanding to use more advanced investment options. They seem to set that bar quite high too. Earlier in the year, they ruled against an adviser who built a portfolio of single sector funds to a defined and structured model because they felt the individual did not have the understanding to use single sector funds. The person was a company director and had property investments. Most think that was a crazy decision. DIY investors though can do what they like. We see plenty of DIY investors on this forum who say what they are invested in with really poor investment selections. Fashion investing and investing above risk profile are common on the DIY side. But that is DIY. Get it right and you save money. Get it wrong and it can cost you money but you did it yourself.

So, a SIPP is not the best type of pension. It is a type of pension. The best type of pension for an individual will depend on the individual themselves and how they are buying.

jdw2000

dunstonh wrote: »

Where did you hear that? It is wrong.

Generically, SIPPs are the most expensive option. They have lower FSCS protection and are aimed at the more experienced investor wanting access to more advanced investment options. In reality, things are little more blurred than that.

Some SIPPs have marketed themselves as low cost by focusing on the lowest cost investment options they can offer whilst ignoring the more expensive options that you can use. So, they can be cheap. But so can personal pensions. For example, I have a personal pension. Not a SIPP. It can do 0.23% p.a. all in (all charges). My firm arranges hundreds of pensions a year and the majority are personal pensions. A couple of stakeholder pensions and a fair few are SIPPs but they are a minority compared to PPP.

However, that is the advised side of things. We have more choice and options and have a regulator and ombudsman to think of. The DIY side seems to have totally focused on SIPPs. So, when you are going DIY, you are nearly always going to end up in a SIPP. I can't think of any DIY provider that uses a PPP instead of a SIPP. This is not because it is better for you. It is because it is better for the provider. SIPPs do not require the distributor to hold as much money in reserve as personal pension providers. Indeed, when a lot of them started, they hardly had to hold any money. SIPP provider failures were not uncommon. So, they use SIPPs because it was a cheaper option. There are cost pressures on SIPPs that are coming in the pipeline that will not affect PPPs as they already work to a higher level. So, expectation is it that SIPP charges will either have to rise or the providers will have to hit a level of efficiency that covers it (typically viewed as size of assets under management). Consolidation of SIPP providers is expected with smaller ones with low charges either expected to fail and be bought under administration or get bought before that stage. Indeed, some models do seem to exist purely to attract money under management which in turn will attract a buyer.

Looking at suitability.... With stakeholders, there is very little you can get wrong. Providers have to carry out due diligence on the investments (so do PPPs. SIPPs don't although there have been some FOS outcomes recently that have ruled against SIPP providers and they are not happy about it. These are under review as SIPP providers dont believe it is their remit). The funds available on a stakeholder are limited and you get a spread across the range. The only thing a person can get wrong is risk profile. Personal pensions offer a wider fund range but again there is less to go wrong. SIPPs can let all sorts of regulated and unregulated investments in. Virtually all the scams use SIPPs (although some have started moving to SSAS). The general rule is that you should invest within your scope of knowledge and understanding. Advisers are required to take that into account. The FOS would rule against an adviser using a SIPP if the person did not have the understanding to use more advanced investment options. They seem to set that bar quite high too. Earlier in the year, they ruled against an adviser who built a portfolio of single sector funds to a defined and structured model because they felt the individual did not have the understanding to use single sector funds. The person was a company director and had property investments. Most think that was a crazy decision. DIY investors though can do what they like. We see plenty of DIY investors on this forum who say what they are invested in with really poor investment selections. Fashion investing and investing above risk profile are common on the DIY side. But that is DIY. Get it right and you save money. Get it wrong and it can cost you money but you did it yourself.

So, a SIPP is not the best type of pension. It is a type of pension. The best type of pension for an individual will depend on the individual themselves and how they are buying.

Many thanks indeed for that. That's very helpful information.

Recently, Aegon wrote to me and informed me that my company pension was being changed to a new product: Retiready. (I understand this to be a SIPP). A lady I spoke to from Aegon did say it would cheaper, but I didn't ask any details about it.

In the last couple of weeks I asked on this forum what I might be able to invest in, and an answer I got was that my pension might be better off in a SIPP.

So that's where my opinions were formulated. Firstly, thinking that Aegon changing my pension to a SIPP must be beneficial, and secondly what I was told on this forum (albeit as a throwaway piece of advice, rather than them asking my circumstances etc).

bigadaj

jdw2000 wrote: »

Many thanks indeed for that. That's very helpful information.

Recently, Aegon wrote to me and informed me that my company pension was being changed to a new product: Retiready. (I understand this to be a SIPP). A lady I spoke to from Aegon did say it would cheaper, but I didn't ask any details about it.

In the last couple of weeks I asked on this forum what I might be able to invest in, and an answer I got was that my pension might be better off in a SIPP.

So that's where my opinions were formulated. Firstly, thinking that Aegon changing my pension to a SIPP must be beneficial, and secondly what I was told on this forum (albeit as a throwaway piece of advice, rather than them asking my circumstances etc).

Retiready isn't a sipp, it just seems to be a new platform where you choose a level of risk and they assign investments to match.

A sipp means you choose all your investments from those available by the provider and take responsibility for the choice of actual funds, or shares, bonds or other investments and their future performance.

This product seems to be a personal pension with reasonably low charges, it's unlikely to perform spectacularly but would be a safe choice for an inexperienced investor, it most definitely isn't a sipp.

jdw2000

bigadaj wrote: »

Retiready isn't a sipp, it just seems to be a new platform where you choose a level of risk and they assign investments to match.

A sipp means you choose all your investments from those available by the provider and take responsibility for the choice of actual funds, or shares, bonds or other investments and their future performance.

This product seems to be a personal pension with reasonably low charges, it's unlikely to perform spectacularly but would be a safe choice for an inexperienced investor, it most definitely isn't a sipp.

OK, thanks for that. I honestly thought it was a SIPP. Well, I guess it sounds like the right product for me if it's for more inexperienced investors.

Thrugelmir

jdw2000 wrote: »

So if the rule of thumb is £30K by 30,

How many people reach that level by that age. I suspect a minority.

jdw2000

Thrugelmir wrote: »

How many people reach that level by that age. I suspect a minority.

It's definitely a minority. People who have £30K by the time they are 40, or even 50, are probably a minority too.

Hence people who are starting their working lives now, with mandatory pensions, are lucky.

Alice_Holt

Just as an illustration of the benefits of starting early and the impact of compounding returns.

I started a SIPP for my 15 yr old neice some 7 yrs ago, putting in the maximum for a non-taxpayer of £240pm.
This now stands at £47k.

I (and my neice!) have been very lucky in that this time period has happened to coincide with strong equity returns, and the chosen investment funds (Global Investment Trusts) outperformed the market.

Of course,I don't expect this rate of growth to continue, but it's a much better start than I ever anticipated.
Now she is earning, I intend to cut back on my contributions, and encourage my neice to start her own contributions.
With 40+ yrs to go, she now stands a decent chance of an adequate retirement fund (even without the advantage of a DB scheme (in which I have been fortunate to be enrolled in)).