Hargreaves Lansdown SIPP Recommendation

Lumphammer1

Planning on putting £2880 per annum into this and want a low cost and low risk investment.

While HL cap their share fees at £200 per annum, it is unlikely that this will be reached, so their charges will be 0.45% on all of the investments in the SIPP - whether they be funds or shares, ETFs, ITs etc. So, as I see it, the holding costs will be the same for any investment.

To reduce risk I would be looking at a global or near global instrument
but this must have low charges.

Any suggestion? Thanks.

dunstonh

o reduce risk I would be looking at a global or near global instrument

As that involves adding currency fluctuations, then it increases risks.

Any suggestion?

What has your research led you to so far?

bowlhead99

There are plenty of low cost investments but it depends what you mean by low risk.

The funds with very low investment risks that mostly hold cash or short dated government bonds are more likely to be eroded by inflation over time and not likely to achieve much of a growth target. By contrast, the funds that will do a better job of keeping up with and beating inflation over the long term give you the risk that in any given year they may reduce in value instead of rise, because a one year period isn't 'long term'.

For what it's worth, my Mum puts her £2880 net into an HL SIPP each year and takes out £2500-3500 via UPFLS, so there's only an ongoing £1-2k balance apart from once a year after a contribution when waiting for tax relief to hit the account before doing the UPFLS. She just uses https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/l/legal-and-general-multi-index-5-class-i-income which is a global mixed asset medium risk fund that she also has as part of her ISA.

It is cheap enough at about 0.3% OCF, obviously in that context the platform fee of 0.45% doesn't sound very cheap but on small amount of invested money the fee is not a large amount of money - is certainly dwarfed by the tax efficiency of using a SIPP versus not using one at all!

Still, medium risk (as that fund is) isn't "low risk", though they do have versions of the same fund family designed to have lower volatility, e.g. the same fund but with 3 or 4 where the 5 is in the name.

Lumphammer1

dunstonh wrote: »

As that involves adding currency fluctuations, then it increases risks.



What has your research led you to so far?

Sorry, good point, I probably should have added that I have a Stocks and Shares ISA which is valued at over £100k, which would dwarf the SIPP. This is UK centric. So my comment about the SIPP being global to reduce risk should be taken in this light.

My initial thinking was a low cost, global tracker, and I was hoping for some direction in that regard.

Lumphammer1

bowlhead99 wrote: »

There are plenty of low cost investments but it depends what you mean by low risk.

The funds with very low investment risks that mostly hold cash or short dated government bonds are more likely to be eroded by inflation over time and not likely to achieve much of a growth target. By contrast, the funds that will do a better job of keeping up with and beating inflation over the long term give you the risk that in any given year they may reduce in value instead of rise, because a one year period isn't 'long term'.

For what it's worth, my Mum puts her £2880 net into an HL SIPP each year and takes out £2500-3500 via UPFLS, so there's only an ongoing £1-2k balance apart from once a year after a contribution when waiting for tax relief to hit the account before doing the UPFLS. She just uses https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/l/legal-and-general-multi-index-5-class-i-income which is a global mixed asset medium risk fund that she also has as part of her ISA.

It is cheap enough at about 0.3% OCF, obviously in that context the platform fee of 0.45% doesn't sound very cheap but on small amount of invested money the fee is not a large amount of money - is certainly dwarfed by the tax efficiency of using a SIPP versus not using one at all!

Still, medium risk (as that fund is) isn't "low risk", though they do have versions of the same fund family designed to have lower volatility, e.g. the same fund but with 3 or 4 where the 5 is in the name.

Thanks very much. I was always thinking of a equities based investment, will think about bonds or mixed assets. I was initially thinking along the same lines as your Mum's strategy. Could I ask how many years she had done this? - as I was a little unsure how far the inland revenue's patience would last. I will look at those L& G funds.

System

Lumphammer1 wrote: »

To reduce risk I would be looking at a global or near global instrument but this must have low charges.
Any suggestion? Thanks.

dunstonh wrote: »

As that involves adding currency fluctuations, then it increases risks.

The idea that global diversification increases risk is utter nonsense. Since the returns from stock markets are not perfectly correlated, global diversification reduces risk.

xylophone

as I was a little unsure how far the inland revenue's patience would last.

Why?

https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/pension-tax-relief-eligibility

If you don’t have earnings, you can still get tax relief on your contributions up to £2,880 net.

If you are 75 or older you can technically contribute towards a pension scheme, but your contributions will not qualify for tax relief.


https://www.moneyadviceservice.org.uk/en/articles/tax-relief-on-pension-contributions

If you have no earnings or earn less than £3,600 a year, you can still pay into a pension scheme and qualify to have tax relief added to your contributions up to a certain amount.

The maximum you can pay is £2,880 a year. Tax relief is added to your contribution so if you pay £2,880, a total of £3,600 a year will be paid into your pension scheme, even if you earn less than this or have no income at all.

This applies if you pay into a personal or stakeholder pension yourself (so not through an employer’s scheme) and with some workplace pension schemes – but not all. The way some workplace pension schemes give tax relief mean that people earning less than the personal allowance (£12,500 in the 2019-20 tax year) won’t get tax relief.

bowlhead99

Lumphammer1 wrote: »

Thanks very much. I was always thinking of a equities based investment, will think about bonds or mixed assets.

An equity based investment is not going to meet your criteria of 'low risk' as the global stock market (or an individual regional market within it, such as UK or US or Europe or Japan etc) might lose 40-60% over a period of just a couple of years.

That's high risk, though if you are investing for a long time period you will get a chance for the volatile ups and downs to average out to something that hopefully gets you a nice long term positive return.

Essentially, people can probably tolerate greater risks if they are doing it over a long period; but if a nervous person sees their fund dropping heavily (whether or not they actually want to spend the money in the near future), they may sell out in a panic and destroy their wealth by being out of the market when it goes back up. So if you have a short timescale OR are naturally a cautious investor, you shouldn't be thinking about using funds which invest 100% of the money into equities

If you want something more mellow, use a mixed asset fund.

I was initially thinking along the same lines as your Mum's strategy. Could I ask how many years she had done this? - as I was a little unsure how far the inland revenue's patience would last. I will look at those L& G funds.

She has been doing it maybe five years now, since stopping and deferring her state pension and having some spare personal allowance. Assuming the rules on those max contribution levels for non earners don't change - which they haven't for years - she'll keep doing it another five years or so.

The HMRC rules allow you to do a £3600 gross contribution if you're a UK resident under 75, even if you don't have any qualifying income at all.

The HMRC rules also allow you to take money out of your pension scheme if you're 55 or over. If you don't have any employment or business earnings and are just relying on the £2880/£3600 allowance, the action of taking some of your pension now doesn't have an adverse effect on your allowable contributions, because you're already restricted to the £3600 gross anyway.

So, there's no issue from HMRC perspective, making annual gross contributions and withdrawals of broadly the same amount without leaving much actually invested. You can take the money out and invest through an ISA instead. The only problem with that tactic is that SIPP providers generally don't like you taking the mickey, creating an account and getting them to claim tax relief for you and then swiftly closing it down without letting them have a chance to earn fees.

With HL if you let your SIPP account fall to a balance under £1k they reserve the right to close your account and bill you an account closure fee. So, Mum's account is generally kept in the £1.2k to 2.5k range except when it temporarily balloons a bit bigger when she gets around to making a contribution and distribution, generally in the first few or last few months of a tax year.

Economic wrote: »

The idea that global diversification increases risk is utter nonsense. Since the returns from stock markets are not perfectly correlated, global diversification reduces risk.

However, the OP wasn't looking for stock market returns, but low risk returns. You can get low risk returns from short dated government bonds or cash products, but currency movements can create losses with those 'low market risk' product which wouldn't exist if you invested in UK/GBP only rather than a global basket. So in a conventional sense of the word, introducing currency risk to a 'safe' product does increase risk and is not utter nonsense.

It later transpired that he had actually been thinking of a stock market fund, in which case it is good to be diversified rather than gamble on one economy, but still there is more currency risk (differentiating that from other types of market risk) on the asset valuation by holding shares of Hudson News and Walmart rather than solely WH Smith and Tesco.

Thrugelmir

Economic wrote: »

Since the returns from stock markets are not perfectly correlated, global diversification reduces risk.

In 2018, 80% of global stock market trading was conducted in just 110 stocks. While stock markets are not directly correlated. Investors jumping on the same bus are.......

When passive investing who sets the price that a company's shares are worth?

Albermarle

was a little unsure how far the inland revenue's patience would last.

If you are thinking it is some kind of loophole that will be closed down then that seems unlikely. Compared to the benefits higher rate taxpayers get for example , then this is relatively small beer and it has been capped anyway ( no inflation adjustment)

Lumphammer1

bowlhead99 wrote: »

An equity based investment is not going to meet your criteria of 'low risk' as the global stock market (or an individual regional market within it, such as UK or US or Europe or Japan etc) might lose 40-60% over a period of just a couple of years.

That's high risk, though if you are investing for a long time period you will get a chance for the volatile ups and downs to average out to something that hopefully gets you a nice long term positive return.

Essentially, people can probably tolerate greater risks if they are doing it over a long period; but if a nervous person sees their fund dropping heavily (whether or not they actually want to spend the money in the near future), they may sell out in a panic and destroy their wealth by being out of the market when it goes back up. So if you have a short timescale OR are naturally a cautious investor, you shouldn't be thinking about using funds which invest 100% of the money into equities

If you want something more mellow, use a mixed asset fund.


She has been doing it maybe five years now, since stopping and deferring her state pension and having some spare personal allowance. Assuming the rules on those max contribution levels for non earners don't change - which they haven't for years - she'll keep doing it another five years or so.

The HMRC rules allow you to do a £3600 gross contribution if you're a UK resident under 75, even if you don't have any qualifying income at all.

The HMRC rules also allow you to take money out of your pension scheme if you're 55 or over. If you don't have any employment or business earnings and are just relying on the £2880/£3600 allowance, the action of taking some of your pension now doesn't have an adverse effect on your allowable contributions, because you're already restricted to the £3600 gross anyway.

So, there's no issue from HMRC perspective, making annual gross contributions and withdrawals of broadly the same amount without leaving much actually invested. You can take the money out and invest through an ISA instead. The only problem with that tactic is that SIPP providers generally don't like you taking the mickey, creating an account and getting them to claim tax relief for you and then swiftly closing it down without letting them have a chance to earn fees.

With HL if you let your SIPP account fall to a balance under £1k they reserve the right to close your account and bill you an account closure fee. So, Mum's account is generally kept in the £1.2k to 2.5k range except when it temporarily balloons a bit bigger when she gets around to making a contribution and distribution, generally in the first few or last few months of a tax year.


However, the OP wasn't looking for stock market returns, but low risk returns. You can get low risk returns from short dated government bonds or cash products, but currency movements can create losses with those 'low market risk' product which wouldn't exist if you invested in UK/GBP only rather than a global basket. So in a conventional sense of the word, introducing currency risk to a 'safe' product does increase risk and is not utter nonsense.

It later transpired that he had actually been thinking of a stock market fund, in which case it is good to be diversified rather than gamble on one economy, but still there is more currency risk (differentiating that from other types of market risk) on the asset valuation by holding shares of Hudson News and Walmart rather than solely WH Smith and Tesco.

Thanks again. Brilliant. That is exactly the sort of information i was hoping for. Does you mother need to sell the fund to release cash to make her withdrawals, or does she hold the majority in cash and just have the £1.2-2.5k holding in the fund? Looking at the L & G mixed assets fund, it looks to be a fund of funds, so effectively you are paying fees twice? In any case, as you say, the fees are a minor factor compared with the overall picture.