Personal pensions may have fallen out of favour but there is a better way of saving for your retirement.
Personal pensions may have fallen out of favour but there is a better way of saving for your retirement.
Traditional personal pensions are increasingly seen as synonymous with high charges and poor performance. That's why a growing number of people are deciding against saving for retirement in the conventional way. Even the stakeholder pension initiative has failed to bring low-cost pensions to the masses.
But I don't think all pension schemes should be tarred with the same brush.
When it comes to choosing a pension you could go beyond traditional schemes and instead take a look at Self-Invested Personal Pensions or what are commonly known as SIPPs. SIPPs may sound more complicated but they operate under the same rules as ordinary pensions. Put simply, they're a do-it-yourself version. For a re-cap of the basics, take a look at Pensions For All The Family.
I'm not saying SIPPs are for everyone. But if you don't have much faith in pension providers to do a decent job on your behalf, why not take control yourself? Here's why I prefer SIPPs over personal pensions:
SIPPs Allow More Investment Freedom
Most personal and stakeholder pension schemes offer a very limited range of managed funds. If the pension company in question doesn't happen to have great fund managers, performance will suffer. The beauty of SIPPs is they can give you access to a huge range of funds from numerous different managers so you can cherry pick the best ones. This usually includes everything from simple trackers to more adventurous emerging markets funds.
What's more, confident investors can directly hold stocks and shares through a SIPP. Many schemes offer the opportunity to invest in more adventurous assets such as unquoted shares, AIM (Alternative Investment Market) listed shares, investment trusts, futures and options and even commercial property. You'll have to pay extra for the privilege, however.
Even if exotic investments aren't your cup of tea, I still think SIPPs are suitable for many of you who want to keep things simple but also want to take control of your own retirement planning.
SIPPs Can Be Cheaper
Once upon a time, SIPPs only really worked for people who were already pretty well off. When SIPPs were launched they, generally charged high flat fees which were only cost effective for those with large pension funds. But thankfully times have changed and the arrival of online and low-cost SIPPs means they are much cheaper now.
Charges are crucial because they can really pull down the performance of your pension. Take a look at these figures based on monthly contributions of £300 assuming annual growth of 7%:
Annual Management Charge | Pension fund value after 25 years |
|---|---|
0.5% | £146,408 |
1.0% | £136,261 |
1.5% | £126,976 |
2.0% | £118,475 |
2.5% | £110,685 |
Source: Hargreaves Lansdown.
As you can see, even a 0.5% difference in charges can have a huge impact on your fund value. That's why it's so important to take a very close look at the charges on SIPPs. Some schemes remain pretty expensive -- charging several hundred pounds for both set-up and annual fees. This usually applies to full-blown SIPPs so make sure you go for the low-cost version if you don't want to invest in anything racy.
I like the low-cost Vantage SIPP from Hargreaves Lansdown (HL) and the Personal Pension from Fidelity (confusingly it's called the Personal Pension but it's still a SIPP!). SIPPs have been criticised for insisting on high contributions from investors. But this isn't always the case. HL requires a minimum monthly payment of just £50 gross. That's £39 net from you at current tax rates. If you want to invest a single sum you'll need to pay £1,000 gross (£780 net).
Both schemes charge absolutely nothing for set-up and annual administration. What's more, old pension schemes can be transferred into these SIPPs for free. That's a great way of consolidating everything into a single pension pot allowing you to keep track of how your fund is growing more easily.
But don't forget you will have to pay annual management charges (AMC) for the investment funds you choose. That said, HL tells me that around 1,500 of the funds they offer cost exactly the same through the SIPP as they would do outside it.
Even Cheaper Trackers
Regular readers will know we're advocates of index-tracking funds here at The Fool. I think these can make a good core investment for a SIPP if you're looking for an uncomplicated investment.
Luckily my favourite tracker fund - the Legal & General UK Index Trust - is available at a low cost of 0.51% through the Vantage SIPP. This is exactly the same charge you'd pay if you invested directly with Legal & General. Likewise, the Fidelity Moneybuilder UK Index Fund is available at the same tiny charge of 0.28% through the Fidelity SIPP.
But the prize for low cost goes to the Vantage SIPP for offering HSBC's FTSE All Share Tracker Index fund at the bargain basement charge of just 0.25%. This is actually 0.75% cheaper than investing directly with HSBC which charges a full 1%! Not surprisingly, the HSBC tracker is found amongst HL's ten most popular SIPP funds.
The Fool's Own Pension
We're so convinced that SIPPs are a better option that we're going to transfer our TMF staff stakeholder pension scheme. Our original plan is no longer competitive on charges and offers just a handful of funds. So we've decided to put our money where our mouth is and upgrade to a low-cost, flexible SIPP. Perhaps you should think about that too...
More: Choosing A Low Cost SIPP | If you fancy moving to a SIPP too why not take a look at The Motley Fool SIPP.