Individual personal pensions typically have a range of around 200 funds, with the total charge usually starting at between 0.7% to 1%. Charges usually reduce when your fund reaches a certain level such as £20,000 or £25,000. This is called a ‘large fund discount’.
For example, if the starting charge is 0.7% of your fund, and the charge falls to 0.4% when you have £20,000 saved, then if you had £40,000 saved the average charge would be 0.55% (i.e. £20,000 charged at 0.7% and £20,000 charged at 0.4%).
A large number of funds is usually available at the standard charge but some funds may have a surcharge in addition to the standard charge.
Self-invested personal pensions (SIPPs) and stocks-and-shares ISAs (S&S ISA)
SIPP and S&S ISA charges come in two parts:
SIPP and ISA administration charges cover the basic costs of running the plan. For example, collecting contributions, reclaiming tax relief from HMRC, operating call centres, IT systems, paying out retirement benefits and so on.
SIPP and ISA administration charges come in three different styles, particular to each provider:
A single percentage charge that covers everything. These charges start from around 0.35% up to 0.45% of your savings a year. The level of charge may also reduce when your savings reach set thresholds. This type of charging structure is usually most cost-effective for those with savings up to around £250,000.
A series of fixed £s charges or time-costed charges. These charges may be for setting up the plan, annual administration, starting income withdrawals, purchasing funds, taking regular withdrawals and so on. This type of charging structure depends on what you do and how much you are charged for each task, but is usually most cost-effective for those with savings above £500,000.
A combination of 1) and 2). Be careful with this type of charging structure. It is often advertised with low headline percentage fees of 0.2% or 0.25%, but once £s fees are added to pay for specific actions, like taking income withdrawals, it can become expensive, especially for those with total savings of less than £100,000.
One final note on SIPP and ISA administration charges is that some providers add all your investments together – SIPP, ISA and other investments – when calculating charges. So, if you are happy to keep all your investment administration in the one place, this could be a good deal. And it allows you to see all of your investments in one place.
SIPP and ISA investment charges
On top of the administration charge, you will also pay charges for the investments you choose. And the charge varies depending on what type of funds you choose.
Index-trackers or ‘passive’ funds. These are the cheapest and track stock and bond indices like the MSCI World Index, the FTSE All Share and the UK Government All Stocks Index. With this type of investment, you have to choose which asset classes you want to track, for example, UK shares or foreign shares, bonds or shares or a mix of both, and so on. Expect to pay just 0.05% to 0.1% of your investments a year.
Multi-asset funds that invest in index-trackers. With this sort of fund, the fund manager decides whether and how much to invest in any one asset class. For example, how much to invest in stocks or bonds, whether to invest in UK trackers or overseas trackers, and so on. Expect to pay between 0.2% and 0.4% for this type of fund.
Actively managed funds – single asset classes. With this sort of fund, the investment managers research individual shares, bonds and properties, before deciding which ones to buy. These are a bit more expensive because of the greater human involvement. Charges start around 0.6% with most funds in the 0.6% to 0.8% bracket. However, there is a wide range of charges with some charging over 2%.
Actively managed funds – multi assets. Within these funds the managers invest within a range of different assets such as UK shares, overseas shares, bonds and cash. They also carry out research to identify which stocks and shares to buy. These funds are often referred to as ‘managed’ or ‘balanced’ funds. Expect to pay somewhere between 0.6% and 1% for this sort of fund.
Multi-manager or manager of managers. In these funds, the fund manager blends together funds managed by other fund managers. Because there are two layers of active fund management, the charges for these funds tend to be high. Expect to pay between 1.2% and 2% for multi-manager funds.
Individual stocks and shares. Some SIPPs allow you to pick your own stocks and shares. You will usually have to pay a dealing fee of somewhere between £5 and £15 for every stock or share you buy or sell and you will also pay the market ‘spread’ – the difference between the buying and selling price (also called bid/offer and bid/ask). However, when you invest in funds, the fund manager also incurs a buy/sell spread and has to pay dealing or brokerage fees, which will be reflected implicitly in the fund price.
Total SIPP charges. As you can see, SIPP and ISA charges can vary from 0.4% for cheap percentage-fee administration plus a cheap tracker fund, to over 2% for a more expensive service and investments such as multi-manager funds.
Charges do make a difference as you can see in the following examples:
Someone with a £100,000 retirement fund, whose fund grows at 3% a year after taking into account inflation, and who takes income of £5,000 a year at the end of each year.
No charges – the fund would last almost 31 years
1% charges – the fund would last 25 years
2% charges – the fund would last just 22 years
Someone saving up for retirement over a 30-year period. Their fund grows at 3% a year after taking into account inflation and they save £2,000 a year at the start of each year.
No charges – at the end of 30 years, their fund would be worth about £98,000
1% charges – at the end of 30 years, their fund would be worth around £82,750
2% charges – at the end of 30 years, their fund would be worth around £70,250
So should everyone just opt for the cheapest deal? Yes and no.
You should choose an ISA or SIPP based upon what you want it to be able to do, how good the service is and whether you trust the provider. You should also choose funds based on your attitude to risk, capacity for loss and your objectives.
For example, you may want to minimise volatility if you are taking income withdrawals, in which case a cheap tracker fund might not meet your needs. You may want to choose a more expensive smoothed or volatility-controlled fund instead, both of which cost more.
However, once you know what service and funds meet your needs, you should aim to get the best deal possible.
Some people also think that paying higher charges will result in higher investment returns that more than wipe out the effect of paying more. Whilst that is true for some funds, it is certainly not true for all or even the majority of actively managed funds.
So, if you are going to pay premium prices for something like a multi-manager fund (manager of managers), make sure the performance lives up to the price you are paying by checking it regularly.
Top tip – investment on the cheap
When you buy a multi-asset fund, a managed fund, a balanced fund or a multi-manager fund, the investment manager is making a decision about what percentage of the fund to hold in shares, what percentage to hold in bonds, what percentage to hold overseas and so on. You pay for this service; a fund will typically cost anywhere between 0.2% and 2% depending upon whether the asset specific funds that make up the overall fund are index-trackers or actively managed funds.
However, online services from the likes of Morningstar and Trustnet analyse these more expensive funds in great detail, showing how much of the fund is invested in bonds or shares, how much is invested in US shares or UK shares and so on.
Once you have that information, you can replicate the fund using cheap trackers costing only 0.05%-0.1%. For example, if 40% of the fund you want to replicate is invested in UK equities, you could invest 40% of your fund in a UK All Share tracker. If another 30% of the fund is invested in US bonds, you could invest 30% of your fund in a US bond tracker fund.
This allows you to replicate the asset allocation of expensive funds on the cheap.
Whilst this may cut your costs, you might not be able to replicate the performance for a number of reasons:
The information you get on the make-up of the fund will be a bit out of date. This information is taken from fund fact sheets, which are published a few days or weeks after that information was correct. However, the make-up of managed/balanced/multi-asset/multi- manager funds does not change drastically from month to month.
When you invest in overseas investments, your investments are subject to currency risk. If you invested in say US stocks which go up in value, that gain may be wiped out if the $ falls relative to the £. Some active managers hedge out currency risk.
When buying trackers, you track the whole market whereas active fund managers will buy specific shares.
However, accepting that this approach does have some drawbacks, it does allow you to ‘borrow’ asset allocation ideas from professional fund managers without paying for the pleasure.
Should I switch out of old pensions and ISAs into a new one?
Like everything you pay for, you should keep your pension and ISA charges under regular review. The market price for pensions and ISAs doesn’t change as regularly as say gas and electricity or motor insurance. Even if you looked at your pension and ISA charges every three years, you probably won’t see much difference compared to a new product. However, charges are more likely to fall over the medium to long-term.
If you have an old pension that you took out in the 1980s or 1990s, you may be able to reduce your charges by switching to a new personal pension or SIPP.
However, you need to exercise care before transferring. In particular, you should think twice before transferring the following types of pension:
Pensions invested in with profits funds. These often contain guaranteed growth rates of between 0% (the value of your fund will never fall) to 4% a year (the fund goes up by at least 4% a year). In context, 20-year government bonds are only paying 1.8% a year if held to redemption, so a 4% guarantee is very valuable. A 0% guarantee is still valuable, particularly if you want reassurance that the value of your fund is not going to fall. However, you could consider a 0% guarantee less valuable if most of the with profits fund is invested in government bonds. In other words, the more of the fund is invested in shares (or the higher the ‘equity backing ratio’) the more it is worth hanging on to.
Pensions with guaranteed annuity rates. Some old pensions contain guaranteed rates at which you can convert your pension into a guaranteed income for life. In many cases, the guarantee is worth twice the value of the fund. For example, if you have £30,000 in your fund, this might normally buy you a guaranteed lifetime income of say £1,500 a year. But the guaranteed annuity rate may offer you an income of £3,000 a year which would cost about £60,000 to buy today.
Pensions with high exit penalties. Some older pensions have high exit penalties although the maximum exit penalty after age 55 is 1%. If you have a pension with a high exit penalty and you are under 55, it may be worth hanging off transferring to a new pension until you reach age 55. In addition, there is a general trend amongst pension providers to reduce exit charges. So you may find that your provider reduces exit penalties voluntarily, even for those under 55.
If you are thinking about transferring pensions with guarantees or high exit penalties, getting advice from a qualified financial adviser could be the best bet. If you have a pension with a guaranteed annuity rate that you want to transfer, you will have no option but to take advice if the pension is valued at £30,000 or more.
If your pension or S&S ISA is just investment-linked with no guarantees or high exit penalties, then you should seriously consider moving it to a new pension or ISA. You are likely to be paying more than 1% a year, and you could easily reduce that cost to somewhere between 0.6% and 1%, even investing in a similar style of fund to your old pension.
Most providers will help you transfer over from your old pensions and ISAs to a new one, so dig out the paperwork for your older investments and check how much you are paying.
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