Cheapest pension for trackers?
|Retirement | SIPP
Asked by Fatenbread, submitted
24 June 2010.
I read your comparison of Skandia's CRA pension to the low-cost SIPPs provided by Hargreaves Lansdown and others with interest (8 June 2010).
This is the question I am currently wrestling with, however unlike your previous correspondent (who was close to retirement and had a pension pot of £250k+), I am two years into saving for retirement and in the process of changing jobs.
I am transferring an existing fund of c.£20k from my previous employers in-house defined contribution scheme and will be making contributions of c.£750 a month going forward. I want to invest this in tracker funds with the widest possible geographical reach and the lowest possible AMC / TER.
How does this affect the relative merits of the various schemes discussed?
My impression is that the Skandia CRA will be the best bet given the starting value of the fund, provided I can find an IFA who will charge me a couple of hundred quid to set up the scheme and then rebate the up-front and residual commissions back to the fund. Am I right?
Answered by Justin on 25 June 2010
The Hargreaves Lansdown (HL) SIPP doesn’t tend to be cost effective when holding investments that don’t pay commission, which includes most tracker funds, as HL charges an extra SIPP fee of 0.5% & VAT a year (capped at £200 & VAT).
The Skandia Collective Retirement Account (CRA) makes more sense for tracker funds as there’s no extra charge - just the standard £52.32 annual fee and underlying fund charges. The cheapest trackers on the Skandia platform, run by Blackrock, have total annual charges (TERs) of around 0.25% and pay no commission. HSBC and Fidelity trackers are not far behind. Most of the other available trackers tend to charge between 0.5% and 1% a year with trail commission of 0.25% that may be offset if you can find an obliging adviser. Take a look at Skandia’s fund list for more info. The £52.32 annual charge equates to around 0.25% of a £20,000 pension fund, but will obviously fall as a percentage as the fund grows.
A third option would be to invest in exchange traded funds (ETFs) within the Sippdeal SIPP. Because Sippdeal has no annual SIPP ‘wrapper’ charges you’ll just pay a dealing fee of £9.95 every time you buy or sell shares. I realise a £9.95 dealing fee won’t be very cost effective for £750 monthly contributions, especially if split between several ETFs (as one dealing fee per ETF), but it could work if you’re happy to invest annually instead. You’d certainly have the widest choice of trackers as the ETF market is growing rapidly.
Finally, don’t ignore stakeholder pensions, as this could be cost effective when bought through a bargain basement discount broker. For example, the Scottish Widows stakeholder pension offers 12 tracker funds and 23 managed funds. The annual charge for all these funds is 0.55% for single payments and 0.64% for regular payments when purchased through discount broker Cavendish Online. You’ll just need to pay Cavendish a one-off £35 application fee.
In summary, using Skandia seems an eminently sensible choice provided you can find an adviser willing to work on the basis you mention. Otherwise the other options I've mentioned could work out well, depending on the exact funds you wish to buy.
On a wider note, while trackers are often a good idea they don’t always work better than actively managed funds, particularly in some regions and/or asset types. I’d suggest considering a few actively managed funds too, if relevant, to achieve a better overall balance.