Shopping for your Sipp: a DIY guide
Here’s how to get value for money from a self-managed pension, says James Connington
Getting a good deal when choosing a self-managed pension is crucial to maximising investment returns, but establishing which is best value can be time-consuming. There is a huge range of platforms, each with pages of material to plough through. Opening a self-invested personal pension (Sipp) through a platform, such as those detailed here, provides a wide choice of funds and shares, in addition to easy switching, administration and online management.
The question of which platform (otherwise known as a fund shop, investment shop or fund supermarket) to invest through can be just as important as choosing what to invest in. Each comes with different fees, depending on the portfolio size, that significantly eat into returns if you are not careful.
We have just the help you need. The table below, using data from specialist consultancy Lang Cat, details the cost of administering different pot sizes in both percentage terms and in pounds. The figures assume a saver makes two fund switches each year.
At a glance, it will show you whether your existing investment shop is cheap, expensive, or somewhere in the middle. The table reveals striking differences between the cheapest and most expensive firms, with savers potentially paying thousands of pounds over the odds to administer their portfolio.
For instance, an individual with a £500,000 Sipp portfolio could pay as little as £200 a year for its administration, or as much as £2,900, depending on the fund shop chosen. To find the best deal available, look for the cheapest option in the column closest to the amount that would be administered. If you’re going to be adding money to your Sipp, aim for the amount your Sipp will ultimately contain.
Why the big differences?
Providers have different pricing structures, and so there is no one provider that offers the best value for all portfolio sizes. For instance, a provider with a flat fee in pounds might be highly expensive for a smaller portfolio size, but would then be far cheaper in percentage terms for someone with a large portfolio.
Those with a flat percentage fee are likely to be cheaper for smaller pots, but considerably more expensive for larger amounts.
For instance, Close Brothers charges 0.35pc for every portfolio size. For Sipp portfolios up to the £50,000 mark, it is among the cheaper providers, but becomes the second most expensive by the £1m point. Interactive Investor, iWeb and Halifax are the three providers which are consistently cheap between the £50,000 and £1m marks.
For a £500,000 portfolio, the first two charge just £200 a year, and the latter charges £250. This is compared with the most expensive, Chelsea Financial Services, which charges £2,900.
Don’t miss out on the pension boost
Many people choose to save in Sipps, as the tax relief and annual allowances are more generous than on Isas. A basic-rate taxpayer putting money into a Sipp benefits from an immediate 25pc uplift, as the Government automatically adds 20pc tax relief.
So an £8,000 contribution would be topped up to £10,000. Higher-rate taxpayers can claim an additional 20pc via their tax return, meaning a £10,000 Sipp contribution could cost as little as £6,000. Only those who pay enough tax at the higher rate are eligible for the full additional 20pc.
An additional rate taxpayer can claim back up to an additional 25pc via a tax return, on top of the initial 20pc relief. That means adding £10,000 to a Sipp could cost as little as £5,500.
The money that’s claimed back by higher and additional rate taxpayers through their tax return could then be re-invested into the Sipp, attracting another round of tax relief.
As with other pensions, Sipps cannot be accessed until the individual turns 55, and the money is subject to tax on the way out, apart from a 25pc tax-free lump sum.
Is the change worth it?
The best solution is to choose the cheapest provider for your circumstances from the outset - but if you want to switch, watch out for extra costs.
If you decide to switch providers, there are a number of elements you should consider. If you are already a customer of one of these companies, the question is whether you could save by switching and whether it would be worthwhile. The tables will answer the first question but the response to the second is less clear-cut and depends on how great the savings would be and your exact circumstances. If you have both Isas and Sipps, then it’s worth remembering that some fund shops levy separate charges on the two accounts while others don’t.
It is far simpler to make a switch while you are still saving, rather than moving a pension you are already drawing from, but there are still costs to watch out for. Some fund shops will charge you to transfer investments to another provider, and the receiving shop may charge too. For instance, AJ Bell Youinvest charges £25 per holding plus £75 to transfer out.
Transferring can also be a drawnout process, potentially taking weeks or months, and the new provider may not offer all of the investments in your existing plan.
Another option is to sell all of your shares and funds at the existing provider, and transfer the money across to the new provider as cash. This could be cheaper, depending on the providers; AJ Bell Youinvest charges £75 to transfer out in cash. However, this will take you out of the market for some time, although the transfer will be faster than moving holdings.
This could lead to you missing out on good days in the market, which can significantly affect total returns, although clearly if there is a downturn you will do well by having the money temporarily in cash.
Switching an account that is already in drawdown is far more complicated, and is something that is rarely done. This is because transferring the account triggers an income recalculation and forces future reviews.
‘Tax relief is more generous in Sipps than in Isas’