SIPPs - only if you have a pension of £ 100 K

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
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buildingbuilding Forumite
531 Posts
SIPPs - A friend who works for friends provident mentions that from he understanding at work it is only worthwhile if you have a pension worth £ 100 K already. Is this true?

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  • PalPal Forumite
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    Right gentlemen.Ten paces, turn and fire.


    One, two....

    :)
  • EdInvestorEdInvestor
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    building wrote:
    SIPPs - A friend who works for Friends Provident mentions that from he understanding at work it is only worthwhile if you have a pension worth £ 100 K already. Is this true?

    No :D

    Worthwhile from around 15k-20k.To some extent it depends on how you invest the money.With smaller amounts, a SIPP works better with a lump sump from transferred-in pensions than with regular contributions.

    Your friend may be a bit confused, because in the past, SIPPs were mainly used by people who wanted to put their pension funds into I***** D*******, rather than give up their capital to buy an A******.In the olden days, this was only advised for funds worth over 100k.

    Recently, things have changed :)
    Trying to keep it simple...;)
  • Edinvestor says.."rather than give up their capital.."

    What do you mean by "their capital"? It is not anybody's capital - it is their pension fund........a fund accumulated with the intention of generating an income to replace earnings.

    Despite Pal's reasonable admonishment, you continue in your attempt to thwart the good intentions of this forum. Your subtle prevarication may sit comfortably in the world of the massed-media, but it is not welcome here.

    Please explain how, for most people, a pension fund of £15,000.00 to £20,000.00 could be more at home in a SIPP than in a top-drawer Stakeholder Plan?

    [Note to building - please excuse this apparent digression; Edinvestor's polarised points of view need to be redressed - she is not an authorised adviser].
    oceanblue is a Chartered Financial Planner.
    Anything posted is for discussion only. It should not be taken to represent financial advice. Different people have different needs, and what is right for one person may not be right for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser; he or she will be able to advise you after having found out more about your own circumstances.
  • EdInvestor wrote:
    No :D

    Worthwhile from around 15k-20k.To some extent it depends on how you invest the money.With smaller amounts, a SIPP works better with a lump sump from transferred-in pensions than with regular contributions.

    Your friend may be a bit confused, because in the past, SIPPs were mainly used by people who wanted to put their pension funds into I***** D*******, rather than give up their capital to buy an A******.In the olden days, this was only advised for funds worth over 100k.

    Recently, things have changed :)

    mmm has mortailty drag suddenly disappeared?
  • ReportInvestorReportInvestor Forumite
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    oceanblue wrote:
    It is not anybody's capital
    The insurance companies have long regarded it as theirs by right :rotfl:.
    mmm has mortailty drag suddenly disappeared?
    Could you clarify this term for everyone? Do you mean the ability of the human race to live ever longer, or the ability of the human race to live longer than the actuaries thought?
  • EdInvestorEdInvestor
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    Please explain how, for most people, a pension fund of £15,000.00 to £20,000.00 could be more at home in a SIPP than in a top-drawer Stakeholder Plan?


    SIPPs can invest in shares and other quoted investments such as property trusts, which ordinary pension wrappers can't. In a low cost SIPP once you've bought the shares, you will incur virtually no charges, unlike a stakeholder, which will cost at least 1% or 1.5% a year.Over 25-30 years this 1% will add up to between 20 and 30% of your total fund, people don;t realise but it's a lot.

    See the effect of charges on pensions here:
    https://www.fsa.gov.uk/tables

    As Adair Turner of the Pensions Commission has said, these charges are one of the major problems with the current system which has caused the pensions crisis. Having lots of small pensions dotted around and ineffectively invested is another problem which makes the system uneconomic.You can fix these problems by shiftying these small pensions to a low cost online SIPP and investing the money to avoid the charges.
    Trying to keep it simple...;)
  • cheerfulcatcheerfulcat Forumite
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    oceanblue wrote:
    Edinvestor says.."rather than give up their capital.."

    What do you mean by "their capital"? It is not anybody's capital - it is their pension fund........a fund accumulated with the intention of generating an income to replace earnings.


    Eh? How is the money I've paid into my personal pension not *my* capital? I may be constrained as to how it is used by various rules but unless and until I am forced to exchange it for an annuity the money in my pension fund surely belongs to me? And, in a SIPP, is totally under my control...
  • Could you clarify this term for everyone? Do you mean the ability of the human race to live ever longer, or the ability of the human race to live longer than the actuaries thought?[/QUOTE]

    Mortality Drag:

    First, it should be understood how a lifetime annuity works. In simple terms, a lump sum is given to an insurance company that agrees to pay back the sum over the expected lifetime of an individual based on a fixed underlying interest rate or the return on underlying investment after costs have been taken into consideration (It may be helpful to think of it as a loan in reverse from the perspective of the individual purchasing the annuity). Those who live longer than the mean lifespan of an '''annuity population''' are effectively subsidised by those who die earlier, and the insurance company usually assumes the risk of making this work based on acturarial assumptions. This is known as a '''cross subsidy'''. An individual may therefore suffer a '''mortality loss''' or '''mortaliy gain''' based on when they actually die. This is a risk they take on board in exchange the guarantee of income for the rest of their lives which cannot be predetermined.

    When an individual delays buying an annuity, say between the ages of 60 and 65, the following occur:
    A. Some of annuity population that would have purchased at age 60 will have died, meaning their subsidy has been lost to those those purchasing at 65.
    B. While the total expected remaining lifespan will have decreased, the mean age of death in an annuity population entering at age 65 will be greater than for a group purchasing at age 60.

    In practical terms, those with an invested amount may gain more from the growth of the investment such that they are still better off waiting until they are older to purchase the annuity. However, where an individual decides to take withdrawals from a given lump sum before buying an annuity the impact of mortality drag becomes very significant and increases exponentially with age.

    For example, using imaginary actuarial assumptions, an individual with £100,000 can buy an annuity with an underlying interest rate after costs of 5% that gives them £8,024 at the end of each year based on a mean life expectancy of 20 years. Instead, they invest in an investment with a fixed return of 5% and take £8,024 at the end of each year. Three years later they use the residual investment, now worth £90,466, to buy an annuity. The mean remaining life expectancy according to the '''mortality tables''' used by the insurance company will not be 17 years but longer. Let us suppose it is 18 years. The annuity that can now be purchased would give £7,739 each year. In order to offset the reduction, the alternative investment used for three years would have had to return 5.47%. If an individual waits longer than three years, the additional growth required will increase over time, reflecting the exponential effect of mortality drag.

    In conclusion, individuals with a good life expectancy may get more out of an annuity than is often appreciated
  • dunstonhdunstonh Forumite
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    See the effect of charges on pensions here:
    www.fsa.gov.uk/tables

    NO pension provider is going to anything for free. If you are going to refer to the FSA tables which show default charging, then you should refer to full charged SIPPs as well. You can get discount stakeholders and personal pensions that beat stakeholders as well as getting discount SIPPs.

    If you are chosing a SIPP for funds and intend to run it like a fund supermarket style investment then you may still be better off picking a personal pension which offers those same funds within it. Equally, you may be better off with the SIPP.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
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