Monday, 23 August 2010

The lowest cost low cost SIPP

My employer offers a money purchase pension scheme administered through a large UK based insurance company. I have been making substantial contributions into this scheme over the last few years which now means that it makes up 31.7% of my Retirement Investing Low Charge Portfolio. In my opinion my employer is very generous with the salary sacrifice scheme they offer as they match my contributions up to a certain limit plus they also contribute the employers national insurance that they save through the salary sacrifice. In addition as a 40% tax payer I get this paid into the pension working on the principle that some day when I retire I will structure my finances so that I am a 20% (or whatever the appropriate lower tax rate is by then) taxpayer on the money that comes out of my pension. With I fair wind I might not even be in the UK having taken my pension elsewhere using the QROPS process. Of course most of you knew this as I had detailed this and more here.

While my employer is generous the same cannot be said of the scheme and its provider. For starters the company is very bureaucratic and bordering on unhelpful. I can cope with all of this though. What actually hurts the most is that the pension scheme certainly cannot be called low cost and my investing strategy is all about minimising fees and taxes. I have minimised these fees to the minimum possible but this pension is still one of the reasons why the fees on my total portfolio are in my opinion still quite high at 0.59%. The pension company offers many fund choices but to give you some perspective they offer funds with fees as high as 2.9%. In my opinion that is a big number and as I showed here I believe that this is only making one person rich and it certainly isn’t the pension fund owner. Of course for these fees I get the obligatory “Financial Adviser” who turns up every 6 months, provides me with nothing of value, then departs so I guess the fees give me something [sic]. When I run the maths though and calculate for the generosity of my employer balanced with the high fees of the pension provider I believe investing in this pension is still the right thing to do for me.

In the past the pension company has been very careful to effectively tie the pension up so that while ever I work for my employer I cannot do anything else with the funds that I have accrued within the pension. I actually enjoy my work so I would never dream of leaving to enable me to take more control of my pension fund. Of course as these insurance companies seem to do they have tinkered with the pension scheme terms and conditions over the years on the back of supposed simplification for members. Unfortunately this simplification never seems to be aimed at reducing fees and to me seem to be clearly aimed at streamlining their back office processes thereby minimising their costs. Whatever happened to win win? They’re at it again but this time I’m happy to report that they seem to have made a mistake and left a loop hole for me to get my previous contributions out while enabling my employer and myself to continue to contribute to the fund going forward. Of course the process will move at the pension company’s snail pace but it means in the near future it’s likely I’ll be in the market for a low cost Self Invested Personal Pension (SIPP).

I’ve now completed a review of the low cost SIPP’s I can find online and it looks like not all low cost SIPP’s are alike. I was able to fairly easily reduce the list to three companies. These are Hargreaves Lansdown, Sippdeal and Alliance Trust. My aim with these funds is simple. I want to be able to buy UK Equities, International Equities (US, Europe and Japan), UK/Europe Property and Index Linked Gilts for the lowest possible cost. In the SIPP world it seems it is not about just minimising the SIPP fees but is actually about minimising the sum of the SIPP and products held within the SIPP’s fees as not all SIPP’s make the same investments available. So let me show what I have found so far.

Hargreaves Lansdown (HL) has a product called the HL Advantage SIPP. At the outset this looked like an attractive opportunity as they have an annual charge of 0% on cash holdings and over 2,000 funds. For all other funds & investments (I read this as individual stocks and ETF’s for example) they charge 0.5% + VAT up to a maximum of £200 + VAT per annum. Great I thought. With some careful management I could buy low cost tracker funds and avoid any fees. Digging deeper though it looks like Hargreaves Lansdown don’t like low cost tracker funds as on their Fee Schedule they further clarify that the 0% is only for “...funds that pay us renewal commission.” Let’s put that in perspective with a nice low cost tracker fund such as the Fidelity Moneybuilder UK Index Accumulation which is the lowest cost FTSE All Share tracker fund I can fund. This has a total expense ratio (TER) of 0.27% however to that you need to add HL’s additional annual charge of 0.5% + VAT. That no longer sounds to me like a low cost SIPP.

In fairness their fund dealing charges are free but their share and investment trust dealing costs seem quite steep at between £9.95 and £29.95 per deal depending on the dealing amount. A £4,000 trade for example would cost you £24.95 which again doesn’t sound overly low cost. I therefore wrote Hargreaves Landsdown off as a low cost SIPP provider for me pretty quickly.

Sippdeal have a product which has no annual administration charges during the accrual phase of the pension. If you are drawing down via a USP or ASP they do however levy charges however in the future the option to transfer to another provider is always there. Their dealing charges are reasonable at £9.95 no matter how big the trade (this one size fits all charge for me is fairer in my opinion as no matter the trade value the cost to the SIPP provider should be the same) as long as you do it online. Unfortunately, they don’t have some low cost funds available within their platform. For example they do not have the Fidelity fund I mentioned above. It does however look like I could very easily construct a portfolio of ETF’s from both iShares and db x-trackers which would have running costs of around 0.38% per annum based on my current pension asset allocation. This fund is a very close second for me at the moment.

The winner for me at this time is Alliance Trust with a product called the Select SIPP. This company has an annual charge of £75 + VAT which if say I had a £100,000 pension pot would next year mean annual charges of 0.09%. Their dealing charges also seem to sit between HL and Sippdeal at £12.50 per online trade. They do however seem to have some sneaky fees (their Table of Charges is quite long) such as if you transfer in from another provider they will hit you up for £50 + VAT so that affects me before my money even makes it to the SIPP. So far it does not seem so attractive so why do I have them as the winners? It comes down to what you can hold within the SIPP. Firstly they allow low cost funds such as the Fidelity fund but also very importantly for me they are the only low cost SIPP provider who gives you access to Vanguard UK’s low cost funds. This means that I believe I could have annual running costs, which includes the SIPP annual charge, plus a selection of Vanguard funds, some iShares Property and Index Link Linked Gilt ETF’s for around 0.30% per annum. This excludes one large one off charge. I would hold a large portion of UK Equities in my SIPP and Vanguard has an upfront charge of 0.5%, which they call the Stamp Duty Reserve Tax (SDRT), when purchasing this fund. All other funds that I would be buying do not have this charge. Overall I feel that I could minimise the effect of this charge by being in this SIPP for many years, maybe even to the point of drawdown, plus also by not rebalancing my UK Equities (and other asset classes also where possible) through the SIPP. Instead I could use my employer’s pension fund where I will still be paying new money. Within this fund I cannot do anything about the high fees but I can play the game as this pension has no buy/sell spreads to worry about plus would also not be susceptible to the SDRT charge if I was to buy and sell regularly.

Of course all of these providers have a multitude of other charges but from what I can see none of these would appear to affect me regularly.

Has anybody been through this process previously? Please feel free to comment as I’m sure many readers would be interested to hear your thoughts. Has anybody had any experience with these providers? Again feel free to comment. As always please also share any thoughts as the more people that engage the more we can all learn.

So that’s what I have found so far. Of course I’ll keep you informed of how it all progresses and if I learn anything more as I continue my research. As always do your own research.

5 comments:

  1. Excellent post as always. I too am a long term investor looking to hold funds for the long term and cut costs to the bone.

    ringledman, HPC

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  2. Hi ringledman
    Any thoughts on on how you are cutting costs to the bone would I'm sure be welcomed by readers of Retirement Investing Today. Care to share?
    Cheers
    RIT

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  3. Another thing with H-L, is that it appears that they don't allow monthly investments into any but their offered funds. So no monthly savings into (for instance) ITs.

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  4. This research pretty much mirrors my own with similar conclusions. Other observations:

    1. H-L are somewhat selective as to the funds they offer e.g. M&G Corp Bond - H-L only offer Class X with a 1.25% AMC (and no discount in a SIPP) whereas AT offer Class A with a net 0.6% (1.0% AMC minus 0.4% discount).

    2. Watch out for drawdown charges in USP - both H-L and AT will only pay monthly income out of (currently) non-interest paying "deposit" accounts whereas my current SIPP provider (L&G via Cofunds) will cash in units from a chosen fund each month without charge. With AT you also pay dealing charges to cash in units to generate funds to move into the deposit account.

    emelcee

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  5. Hi emelcee

    Great that somebody else also agrees with what I have found.

    Thanks for highlighting the other 2 points also.

    Point 1 I guess maximises H-L revenues so if they are going to only offer one I can see why it would be the higher fees option.

    Point 2 is certainly something to watch for also if you are heading into drawdown so great point. I wasn't so focused here as I'm a long way from 55 and I was working on the principle that I could always transfer to another SIPP provider closer to that time. That is one that better suited my USP needs.

    Of course as always their is the risk of what the pensions industry will resemble by the time I reach retirement. We may not even have USP's.

    Cheers
    RIT

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