How to choose a SIPP or Personal Pension?

HarryGray

Hi all,

I already contribute a lot through my auto enrolment as I know this is best, however, for some extra money I have I'd like to look at the option of a SIPP or Personal Pension.

I already have a personal pension with Standard Life. Charges are roughly 1.2% all in per annum, however they give you the 20% tax relief immediately which is great for compounding purposes.

The two SIPPs I've looked at are Fidelity and AJ Bell as they will be roughly 0.5% all in including fund charges per annum. However, the 20% tax relief takes 6-11 weeks to hit your account.

Does the compounding of not waiting 6 weeks make much of a difference? I don't know which option to go ahead with..

Thanks in advance for any help!

cloud_dog

HarryGray wrote: »

Does the compounding of not waiting 6 weeks make much of a difference?

In the scheme of things, not a lot really, and really not worth concerning yourself over.

Re your work pension, I don't suppose they operate payroll via 'Salary Sacrifice' (salary exchange) do they?

SonOf

I already have a personal pension with Standard Life. Charges are roughly 1.2% all in per annum, however they give you the 20% tax relief immediately which is great for compounding purposes.

That must be an old legacy SL pension as their modern versions are much cheaper (about half the cost).

Does the compounding of not waiting 6 weeks make much of a difference? I don't know which option to go ahead with..

The lang cat did some research on pre-funding many years back and stated it was worth 0.x% p.a. However, I cannot recall what the actual figure was.

Why are you not considering the workplace pension? That may be the best very and/or simplest option

atush

For me it is does it have the investments i want offered via the platform? And the charges.

Albermarle

Are you sure when comparing 1.2% for SL and 0.5% for a SIPP you are comparing like for like ?
In other words are the actual investment funds you are looking at in each the same /very similar?

Apart from that SL offer discounts on your total funds . Anything over £25K attracts a discount of 0.3%

As for Aj Bell vs Fidelity . The former has the lower % basic platform charge but has a few added charges . I think they both have good customer service. Cost wise there is little in it , so have a mooch around their websites and see which you prefer.

HarryGray

cloud_dog wrote: »

In the scheme of things, not a lot really, and really not worth concerning yourself over.

Re your work pension, I don't suppose they operate payroll via 'Salary Sacrifice' (salary exchange) do they?

Thanks for the response :-) I already pay in 26% via SS as I don't want to pay back my student loan :rotfl:, company pays in 8%.

HarryGray

Albermarle wrote: »

Are you sure when comparing 1.2% for SL and 0.5% for a SIPP you are comparing like for like ?
In other words are the actual investment funds you are looking at in each the same /very similar?

Apart from that SL offer discounts on your total funds . Anything over £25K attracts a discount of 0.3%

As for Aj Bell vs Fidelity . The former has the lower % basic platform charge but has a few added charges . I think they both have good customer service. Cost wise there is little in it , so have a mooch around their websites and see which you prefer.

Thanks for this reply. I rang and it turns out I actually get a 0.54% discount :beer:, I'm not sure if I'd be entitled to anymore discount (0.3% like you said)?

Albermarle

Thanks for this reply. I rang and it turns out I actually get a 0.54% discount , I'm not sure if I'd be entitled to anymore discount (0.3% like you said)?

A lot of SL customers seem to have a special discount , usually where an ex employer has negotiated a deal and it has stayed with the pension .
No you don't get the standard discount on top:D

cloud_dog

HarryGray wrote: »

Thanks for the response :-) I already pay in 26% via SS as I don't want to pay back my student loan :rotfl:, company pays in 8%.

So, you are happy to forgo an additional 12% savings by paying in to a SIPP?

I have assumed you are a BRT payer.

ffacoffipawb

cloud_dog wrote: »

So, you are happy to forgo an additional 12% savings by paying in to a SIPP?

I have assumed you are a BRT payer.

And the student loan savings too, maybe, depending on how that works.

bowlhead99

HarryGray wrote: »

Does the compounding of not waiting 6 weeks make much of a difference? I don't know which option to go ahead with..

Thanks in advance for any help!

SonOf wrote: »

The lang cat did some research on pre-funding many years back and stated it was worth 0.x% p.a. However, I cannot recall what the actual figure was.

It will vary depending on personal circumstances.

For example think of someone who is putting £400 a month into his personal pension and his pension provider is collecting the basic rate relief for him at £100 a month. He routinely pays in by direct debit on, say, 4th or 5th of the month to make sure he catches the end of the tax month, and invests that money over the next few days - perhaps 6th to the 10th depending on when he has seen the money arrive in his account and when the weekends fall, or he might just have an automatic regular investment set up.

If the provider does not pre-fund the tax relief for him out of their own bank account, he has to wait for them to claim it and then credit it. But the tax claim for the money he only contributed this month is not going to have been paid by HMRC by the end of that month, it will be collected by the provider the following month, and probably credited to the SIPP in the last week or so of that next month. And nobody is going to bother logging in on the exact day it arrives and spending the £100 - they don't mind having a little bit of uninvested cash sitting on the account until they do the next investment purchase (after putting another £400 in), which is on the 6th to 10th.

In that way, the £100 is literally being invested two whole monthly cycles behind where it would have been if the provider had pre-funded it for him at the same time he put his £400 in.

We can see that every single bit of tax relief loses an initial 2 months of market exposure. We know markets go up over time, so there is an implicit cost to delaying an investment, because if you had the money available earlier you would be making money in it (the rate of return always fluctuates of course). A delay of two months out of the market (waiting for HMRC) instead of having the money immediately available in a situation where the pension provider bankrolls it for you, has 'cost' you 2/12ths of whatever your annual average annual return is.

So that's 1/6th of the capital and income growth you were going to make on that money. If your long term total return is 6% a year, losing a sixth of that costs you a whole percent of the tax relief money you invest. Every one of those £100s that you are waiting for the provider to collect from HMRC for you, will suffer this 1% 'entry charge'. It's a pound lost while waiting for £100. Seems annoying. But you are not losing the same 1% on the £400 you contribute, because that's getting invested as soon as you like. Only on the tax relief bit, and the tax relief bit is only 20% of the total money arriving in the account.

So over a year of putting in £500pm (including tax relief) you will end up investing £6000, and will have lost 1% on the £1200 a year tax relief element of it, so lack of pension provider prefunding cost you £12 in missed returns.

If your pension pot is modest, say the average balance over the course of the year is £10-20k, a 'cost' of £12 a year is 0.06 to 0.12%. So if a provider wants to charge a platform fee of 0.25%, it's like he's really charging you 0.31-0.37% for the platform services in an outright comparison with someone else who would prefund your tax relief.

However if you have more money invested in that pension pot, these things are much less significant. Instead of £10k average balance, you might have £100k average balance. Now the £12 'loss' associated with not getting faster tax relief on your £6k of gross pension contributions is not 0.12% but more like 0.01% of your total pot. You hope for an annual 6% return on your pension pot, but due to lack of pre-funding, you make... well, 5.99%, which is basically still 6%.

As the effect is small on decent pot sizes, the major DIY providers who want to have competitive headline fees do not really try to compete with each other on this point. Investors want to see low headline platform fees and profit margins are tight. A platform does not want to give you its own money for two months, or borrow it from a bank, to help you make investments a little earlier. It would rather invest that money itself, or use it for general corporate purposes, and the fact that none of AJ Bell, Fidelity, Hargreaves Lansdown, Halifax Sharedealing etc etc etc want to give their customers the HMRC payout before they even collected it from HMRC, means you just don't really see pre-funding outside workplace pensions or IFA platforms.

Why are you not considering the workplace pension? That may be the best very and/or simplest option

Yes, because as you've mentioned it is a salary sacrifice scheme, when you sacrifice salary to get it paid into the scheme, you will also avoid paying national insurance on the diverted money ... which is surely better than taking your net pay after paying national insurance and deciding you are going to put it into a pension after all.

It depends whether you are genuinely able to afford the £x per month every month or are just looking to put some spare money into the pension from time to time depending on the state of your finances. SS is still very efficient though and a good wheeze. So if you feel you can't commit to doing a salary sacrifice as much as X per month, just up it to Y month - and then you'll have less net pay, and less money to put into your private scheme in the months when finances allow... but still get a good result because the money is already invested as efficiently as possible.