This week, I’m returning to the pensions crisis. I’m not going to bore you with my views on demographics and compulsion (although I have some answers for readers – see box). But I have done some more research on boosting returns and cutting costs.
One of the biggest challenges for all private investors is getting reliable information about costs. Many of the most articulate voices in the passive funds sector – such as Vanguard, TCF and SCM – have pointed out how difficult it is to assess the true cost of ownership of an actively managed fund, including data on the cost of (over)trading.
It’s the same with the pension wrappers in which these funds sit, ie self-invested personal pensions (Sipps). Like many investors these days, I have a Sipp in which I valiantly try to prove my own gloomy views wrong (you can track my progress at www.investorschronicle.co.uk). I’m targeting a long-term return of between 6 and 9 per cent a year, which I admit is a tad optimistic. More importantly, I also try to control my adventurous, speculative instincts and focus on the costs.
We need ‘Nest’ on steroids
A number of readers contacted me after my column on the pensions crisis, and the possible solutions. I have to say that I still do not believe that, in aggregate, individual savings products will produce the desired long-term results – ie, proper funding for our extended twilight years. To answer one reader’s e-mail, I think we need a state-mandated scheme into which we all have to pay, by law, providing a mixture of both defined benefits (remember them?) and supplemental top -ups – with no interference from the government beyond a regular report back to the House of Commons. Call it ‘Nest’ (the new pension scheme for lower paid workers) on steroids’.
But we won’t be getting that any time soon, so we’re left to our own devices and providers’ charges. As one reader pointed out, even if we make generous assumptions about future investment returns, the negative effects of compounded fees will make themselves felt.
Every six months, I review the charges made by my Sipp provider, Hargreaves Lansdown (HL) – for administration and trading. This isn’t an entirely free wrapper, as I have almost no interest in investing solely in conventional unit trusts. As Matthew Vincent has pointed out, major fund platforms such as HL make a great deal of money on the annual management charge for unit trusts – but that means awkward types like me, who prefer listed funds, have to pay twice: first via an account administration fee, and second via dealing charges (although these recently got cheaper for frequent traders).
Looking to the future, I realise that cutting the cost of this pensions wrapper is hugely important. So I was interested to discover a new cost information service from Nottingham-based independent advisers InvestmentSense .
Over the past few months, the InvestmentSense team has been diligently ringing all Sipp providers to ask about their set-up and annual charges, and all their awkward extra charges as well. As far as I’m aware, it’s the most exhaustive price comparison of its kind.
For adventurous Sipp investors, three key pointers emerge.
First, small costs add up. This is especially true if you transfer your Sipp to another provider. It’s not unusual for providers to charge for each product transferred out, with an additional charge per share or asset. Then you’re likely to be hit with the same charges on the way in. You can end up paying not far shy of £1,000 if you’re not careful – an unacceptable amount at a time when the regulator is clamping down on transfer costs.
Second, you need the right amount invested. Sipps only make sense if: a) you’re willing to invest some time and effort; and b) you have enough money in your pot. In a new age of lower returns from developed markets, investors have to focus on the value they get from a service. I reckon that asset allocation advice is worth between 25 and 50 basis points – which is also the maximum I’d pay for fund management. I think the provision of Sipp wrappers is worth at most 50 basis points, preferably 25 – which would suggest that the minimum capital in a Sipp should be £100,000. I’d add one caveat: providers of ‘free’ Sipps, such as HL, might reasonably argue that their low-cost pensions push this entry level down to less than £50,000 (although you are still paying via fund annual management charges).
Third, investors should only buy the Sipp wrapper that works for them. Don’t overpay for an all singing, all dancing full Sipp if you’re not going to buy into a commercial property or into gold bullion bars. For most investors the simple, basic Sipp will do – as long as its scope can grow as your savings pot (hopefully) accumulates.
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