We’re all used to running price comparisons, so why do so many people fail to carry out a yearly pension review when it could generate tens of thousands of pounds?
The Importance Of A Yearly Pension Review And How To Get Others To Do It For You
Your Pension Review Should Focus On Two Key Areas: Charges And Performance
In an ideal world, you’d like the most competitive charges, and the highest fund growth. But as we don’t live in an ideal world, it’s fair to say it’s pretty much impossible.
Generally speaking, the lower the charges, the less flexible your SIPP. Quite often, it can be beneficial to pay a little more to ensure you end up with the SIPP that matches your needs and allows you to invest in all the areas you want. But there’s no point in wasting your money on high charges if you don’t need to.
When it comes to performance, it’s likely the highest growth rates are only achieved by accepting a higher level of risk on your money. If you're risk averse, chances are you’ll have to sacrifice potential returns as a consequence.
Charges: A Quick Review Of The Cost Of Pensions
On average, SIPPclub members have around £250,000 in their SIPPs. So for no other reason, this figure will be used as the basis of a cost comparison of a variety of individual pensions.
Among individual pensions, a Stakeholder Pension has some of the lowest charges. Even though you might only have access to a restricted choice of funds, you could be paying up to 1 per cent to 1.5 per year each year in charges, depending how old it is. That’s around £2,500 to £3,750 each year for a pension worth £250,000.
Although many providers of expensive fund-based personal pensions limit your costs to ‘stakeholder charges’, you might be locked into a contract where higher costs are being applied. It’s not uncommon to be charged 1.75 per cent to 2.75 per cent each year. That’s an incredible £4,400 and £6,900 each year.
You may also be suffering this level of charges on other types of individual pension, such as Free Standing Additional Voluntary Contributions (FSAVCs) and Buy Out Plans (S32 Plans). Some of the early Retirement Annuity Contracts (S226A) could be charged at an even higher rate, though often their charges are difficult to establish without specifically asking your pension provider.
Prudential has been accused 'fleecing' members of a pension top-up scheme by levying a 15% administration fee for withdrawals. One of its clients, who has £80,000 in an AVC scheme, has been charged £12,000 to take out her savings in the first year. Read More
Many of these pensions have their charges structured to a ‘normal retirement date’. If you want to draw your benefits early, or transfer to a different arrangement, you could find large penalties imposed. And some With Profits funds can have penal adjustment factors applied if you move your money when the provider hasn’t made enough profit. It seems incredible that you’re charged if your provider hasn’t performed. Surely, they should be compensating you for delivering poor performance!
Self-Invested Personal Pensions (SIPP)
SIPPs restricted to stockmarket assets only tend to be charged on a ‘percentage of fund’ basis, similar to the pensions above. Competition and the internet have forced charges down, but you might still find you’re giving up around 1.1 per cent each year to your SIPP operator. That’s a sizeable £2,700 each year.
It’s a mistake to believe that because you’re not sent an explicit bill for charges, you’re not paying anything. It might surprise you to learn there’s a bewildering array of charges being extracted. It’s always set out in the smallprint, but who can honestly say they read it? And if you don’t read it, you can't really complain if you discover your provider has been helping itself to a sizeable slice of your pension fund.
When you move away from stockmarket assets into other areas, such as high interest property backed loan notes, crowdfunding and peer-to-peer, and commercial property, the majority of SIPPs are costed on a menu of charges. The more you diversify, the more you pay. So while spreading your money may be a good way to reduce risk, it can often come at a price.
Some SIPP operators charge a fixed price. A typical fee is around £1,500 including VAT. Based on the above example of a £250,000 fund, a fixed price SIPP costs 0.6 per cent each year. That’s not only less cost than all the other pensions illustrated above, you also have a high degree of flexibility of where you can lend and invest your money.
By way of a summary, small pension funds tend to benefit from charges levied on a ‘percentage of fund’ basis. But as it’s clearly not ten times more costly to administer a pension of £250,000 compared to one of £25,000, when a pension fund reaches ‘six figures or more’, a fixed price charging structure can often work out cheaper.
Performance: A Review Of Your Pension Fund
Whilst it clearly makes sense to pay as little as possible for your pension, it’s only part of the story. How your money is growing is as important, if not more so, particularly if you’ve employed the services of a financial adviser or discretionary fund manager.
Quite frankly, it hardly matters if you’re invested in high cost funds, or your adviser’s fees are excessive, if your pension fund is growing well above average stockmarket performance. But unless you carry out a yearly pension review, how do you know?
Why You Need An Annual Pension Review
When your car is three years old, it’s required to have a thorough check-up every year. There’s no such requirement for your pension. But there should be!
A pension is such a long term contract, it’s far too easy to put off a pension review for another day. Or year. Or longer! As a result of the proposed abolition of the pension death tax, your pension fund may last not just through your lifetime, it could be available to your children and grandchildren too.
If you miss out on fund growth for even a few years, it can have a dramatic effect on the future value of your fund. It’s all down to the ravaging effect of compound interest, which can work firmly against you, as you can see from the table below.
Take your eye off the ball even for one year and it could cost you and your family a fortune. It could seriously affect your income in retirement and your children’s inheritance.
Don’t leave it to chance. Set a date in your diary for a pension review, and do it once a year from now on.
You don’t even have to do all of the work. After all, you could be paying out a huge sum of money each year from your pension fund to your pension provider or an adviser, so ask them to do it for you!
The Information You Need For Your Pension Review
1. Fund Charges
A detailed summary of the Total Expense Ratio of all your funds, to give you the most accurate cost of the charges being imposed. If the charges on some funds aren’t transparent, your provider should be able to tell you exactly what it’s deducting to run the funds.
2. Management Fees
A breakdown of the explicit and hidden charges you’ve paid to your pension provider, your financial adviser and your discretionary fund manager over each of the last five years, to establish whether your costs are being fairly charged and you're receiving value for money.
3. Loan Interest and Rental Income
A breakdown of all the interest and rent you've received in each of the last five years, making sure you highlight every late or missed payment as these will reduce your overall return.
4. Fund Value
A summary of the net percentage increase (or decrease) in the overall value of your pension fund in each of the last ten years, to check it’s growing in real terms compared to inflation.
5. Average Stockmarket Performance
A summary of stockmarket performance in each of the last ten years, for the areas of the market in which your money is invested, to enable you to compare your pension against the average.
Analysing The Results Of Your Pension Review
If you’re happy with the net percentage increase on your pension fund, there’s not much to worry about. But if you’re not making enough to meet your current or future needs, or you’re not achieving average stockmarket performance over longer periods, you may need to consider making changes.
- You may be able to reduce the cost of your stockmarket assets by buying them through online platforms that don't impose hidden administration charges within the fund prices.
- If you're not getting value for money for the fees you're paying your adviser or your discretionary fund manager, in either time spent or performance delivered, it's definitely worth discussing this with them.
- You could redirect your money into different types of loans and investments designed to deliver a higher return, in line with your appetite for risk. This might include index-tracker funds.
When it comes to SIPPs, ultimately, it’s down to you. There's no point in moaning to your pension provider for poor performance, for it’s a “self” invested pension. If you don’t carry out a thorough pension review at least once a year, and make changes as necessary, you’ll only have yourself to blame if you and your family don’t end up with as much money as you’d like.
If you don't have the time or inclination to undertake a pension review yourself, that's no reason not to do it. Either speak to your own trusted adviser, or our recommended IFA. Your pension review is likely to cost you a fee, but it could be money very well spent.
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As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk. Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.
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