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Personal Pension vs Self-Invested Personal Pension (SIPP) Charges Calculator - estimate the difference between charges.

 

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The purpose of this calculator is work out the differences between charges under these contracts, based upon different options and timescales.

 

The Background:

 
Changes that came into force in 2006 allowed for a much wider investment freedom within SIPP arrangements than standard Personal Pension.
 
Along with this, there has been a lot of debate about the merits and dangers of such arrangements. Whilst some would have you believe that personal pensions have failed, and only a SIPP can offer the route to stellar investment gains, others will claim that these are potentially dangerous, and more likely a route to investment losses for unsuspecting investors.
 
As always, the truth lies somewhere in the middle. And what is the best route for any individual is based on the personal circumstances, size of pension funds / pension contributions, awareness of investment and investment risks, and their long-term objectives.
 
This page does not go into the pros and cons of each type of arrangement, as either could be suitable or unsuitable for an individual, based on the above criteria.
 

Aim of the calculator

 
What this calculator aims to do is make a comparison between the charges between a modern single-charged Personal Pension (PP) or Stakeholder Pension contract, and a Self-Invested Personal Pension (SIPP). As you will see, the level of charges taken by an insurance company or SIPP provider can make a huge deal of difference between what you pay into a pension, and your accumulated pension fund when you retire or choose to take the benefits. And at the end of the day, this is the whole purpose of a private pension fund - to accumulate as much as you possibly can.
 
Please note: this calculator is of limited use if you are trying to compare a PP against a SIPP that holds multiple asset types - i.e. direct commercial property holdings, individual securities, and professionally managed portfolios. Such a scenario would have a multiplicity of charges that are difficult to regularize. It is of more use to make a straight comparison between an existing pension fund, or new pension contributions.
 
In practise, it is often difficult to make a like-for-like comparison between the two, as they have different or additional charging structures.
 

Personal Pension charging issues

 
Lets start with Personal / Stakeholder Pension Plans. On the surface, you may assume that these are the ‘lower cost’ option. With an emphasis on ‘low charges’ (on a stakeholder plan, they can be no higher than 1% of the size of the fund each year - and in practise, they are often the same - or marginally higher - within a non-stakeholder PP), many assume that they would always suffer less charges under a stakeholder than under a SIPP - however, think again - this is not necessarily always the case.
 
The key fact to remember is that a charge of 1% per annum is taken from the value of your accumulated FUND each year - not 1% of your pension contributions. Using simple compounding, the more valuable your pension fund becomes, the higher the charges become. In the early years, these are usually low - i.e. 1% of £1,000 equates to £10 in management charges - however, should the fund grow to £500,000, this equates to £5,000 in management charges that are taken each year. Once pension funds grow to significantly large amount, these charges can become sizeable over time. As an example, an individual paying £250 per month, increasing by 5% each year, over a period of 40 years would accumulate a pension fund that is significantly less than if no charges at all had been taken at all. (This is a hypothetical example, as there will always be charges implicit in all types of investment.)
 
So when people talk of ‘low charged’ pension fund, a better term could be ‘lowest charged’ - because over a long period of time, you could have difficulty viewing these charges as ‘low’.
 
In practise, they may be other charges, which offset or increase the main Annual Management Charge (AMC). Many insurance companies issue contracts with ‘tiered’ management charges - which means that the charges reduce by a small percentage once the fund hits a certain level - i.e. the AMC reduces by 0.1% if the fund value is £25,000 or more, and a further 0.15% if the fund value is £50,000 or more.
 
One purpose of these rebates is not to penalise those with larger funds at the expense of individuals with smaller funds.
 
You can input a rebate into the calculator when inputting the PP / Stakeholder charges. However, due to the huge number of permutations offered by different insurance companies, this calculator cannot possibly cover them all. Instead it allows a single rebate factor. If necessary, you may need to average these out, or run the calculator a few times with different rebate values.
 
Another charge you can input is a ‘Fund Related Charge’ - these are additional charges taken out of your pension fund each year, and paid to your Professional Advisor (usually an IFA) as fees for managing the investment choice and strategy of your pension fund. These charges are agreed in advance between the individual and the advisor, and are usually in the region of 0.25% - 0.5% of the value of the fund each year. Of course, this is an additional charge that mounts up over time - however, any advisor would argue that this is a small price to pay for active investment management.
 
You can input the ‘Fund Related Charge’ within the calculator, for both PP and SIPP contracts.
 
Generally, the above factors are likely that be the limit of charges applied to PP / Stakeholder Pension contracts.
 

SIPP Charging Issues

 
The investment charges under a SIPP can be bewildering at first sight. However, if you compare different SIPP plans from different SIPP providers, the following charges are usually applicable across the spectrum.
 
  • Set-Up Charge
  • Annual Charge
 
If the SIPP is investing in commercial property, there are likely to be additional initial costs relating to property acquisition. There may also be additional recurring costs relating to property administration.
 
Please note that these are purely administrative costs charged by the SIPP provider for running the SIPP, and remain fixed irrespective of the value of the assets within the SIPP.
 
On top of these are the investment charges. Because you have the freedom to invest widely, you could incur costs in a number of ways.
 
As highlighted above, buying property always incurs costs. Within the calculator, input these within the SIPP section as ‘additional set-up costs’ and ‘additional recurring charges’.
 
If you were solely to invest within Deposit accounts, then there would be no additional investment costs. This is a possibly for investors who wish to take absolutely no investment risks with their pension funds.
 
If you are the type of person who is investment aware, and buy and sell shares and other securities directly on a regular basis, it is possible to appoint an ‘execution-only’ stockbroker, and use your SIPP funds to buy and trade in securities. The costs of doing this are the stockbroker commission per trade (for most on-line stockbrokers, this is usually £10 - £15 per trade). Therefore, the costs of this will depend on how many trades you are likely to make per annum. Some people may build up a portfolio of investment trusts and trade infrequently, while others may actively trade the share of individual companies on a frequent basis.
 
It is possible to factor this into the calculator - you can input the cost per trade, and the number of expected trades each year.
 
ALSO - remember to input the cost of stamp duty that is levied on purchases of shares. At the current rate of 0.5%, the can add up if you make large and frequent trades. See the specific help section in calculator for suggestions on how to factor in the costs of stamp duty.
 
The other main investment charges within a SIPP occur when an individual does not want to take personal individual decisions, but sub-contracts this out to a third-party, usually to a stockbroker or discretionary portfolio manager who will construct you an individual investment portfolio, based upon factors such as your attitude to investment risk, timescales, and other objectives. Similarly, the investment management could be subcontracted out to your IFA, who actively invests your pension money on an advisory basis in a series of investment funds, as opposed to individual securities.
 
The above route is usually applicable to those who have accumulated sizeable existing pension funds, and may not be particularly happy about making their own investment decisions. Normally, a discretionary portfolio manager would not consider an amount of under £100,000 to invest, but this does differ between managers.
 
The cost of using a discretionary portfolio manager can be anything from 0.5% to 1.5% of the fund value per annum. If you use an IFA to manage your pension fund, they will usually take a fund-related charge of c. 0.25% - 0.5% per annum, plus you will have to absorb the cost of the charges linked to the underlying funds that are used - these can vary from c. 0.3% p.a. for cash funds to over 2% p.a. for specialist investment funds. If your advisor holds all your funds within a specialist fund platform, these funds may be purchased at a discount. Averaged out, the fund-related costs are likely to be in the range of 1 % - 1.5%. Alternatively, a ‘Trustee Investment Plan’ may be used - this is effectively an open-ended investment bond for trustees, in which funds can be bough or sold within the Plan. The fund charges within these plans are somewhat similar to investment funds.
 
Within the calculator, if you are likely to use third-party investment services, input the charges within the SIPP section.
 

Specific points relating to charges comparisons

 
You need to accept that if you use the advisory or discretionary route within a SIPP, the combination of SIPP administration charges and fund-related charges is likely to be higher than under a normal PP.
 
It has often been said that SIPP contracts are only suitable for large fund sizes. If you were paying regular small monthly amounts, a significant part would be swallowed by the admin costs, and you may be forced into taking a D-I-Y approach, as the funds involved may to too small to warrant third party management. Also, it may be necessary to accumulate these within a SIPP bank account to avoid monthly dealing costs.
 
If your sole concern is minimizing charges and costs, the D-I-Y approach can be tempting, but has the potential to lose you a fortune instead of making you a fortune.
 

An anology.....

 
Look at it this way - most people would not attempt difficult plumbing or electrical rewiring work in their house, and would not have the time or patience to learn how to do it. Even if they took the time to learn, they still may not be confident that they are doing the task correctly. Most people would hire a plumber or electrician to carry out the work, and pay them accordingly. They may resent the cost of an electrician, but at the end of the day, it is probably better than running the risk of electrocuting themselves or burning their house down. The same comparison can be made to investment management or fund costs. Most people may not like these costs, but again most people do not have the time or inclination to acquire a sufficient level of knowledge to make their own investment decisions, and prefer to employ an professional to deal with it.
 

Conclusion

 
Overall, within a SIPP, the D-I-Y approach can and does work for individuals who directly buy and sell shares outside of a SIPP. As stockbroker commissions are fixed, a sizeable pension fund that is completely self-invested can actually be more cost-effective than a ‘low-charged’ stakeholder plan (that is, unless you are literally trading on a daily basis, and racking up huge amount of costs).
 
However, if you have never bought and sold shares before, it is probably not wise to go down this route. Whilst anybody can make money in a rising stock market, it becomes far more difficult for inexperienced investors in static or falling markets, when conditions become far more difficult. It is likely that you would end up losing money over the long term. For this reason, it is more sensible to invest in ‘collective’ funds via an ordinary PP, or if using a SIPP, via an IFA or Discretionary Manager who can construct a bespoke portfolio for you.
 
If you plan to solely invest in commercial property within a SIPP, this carries a completely different set of risks (and costs).
 
Overall, the purpose of this calculator is not to advocate that a SIPP is better than a PP based on costs alone, or vice versa, but merely to allow you to make a comparison of costs as a starting point. The next point could be to ask is "What are the benefits and disadvantages of each scenario ?".....
 
If in doubt, you should seek professional advice.
 
When you usually the calculator, if you are unsure what to input, click on the context-specific help icons in order to bring up more specific help topics.
 
The figures projected by the calculator are only for guidance purposes, and are by no means guaranteed.
 
 
 

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