Our pensions industry has become a disaster zone. Some people are overpaying by up to 83% for their retirement funds. It's probably time to take control of your funds.
Many employers are moving the risk of retirement savings onto employees and it's costing employees a fortune in hidden fees and poor performance. It's time to hack back the fees that could slash your pension payments in half.
By taking responsibility for your own pension through a self-invested personal pension (Sipp) you can achieve just that.
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If you are saving into a defined contribution (DC) scheme where your employer and you contribute into your segregated fund, then this concerns you.
Cut back fees and improve performance
Bear in mind that a Sipp may not be the best savings plan for you. So if you're in any doubt, it's best to get some advice from a qualified person.
I want to show you how a Sipp works and how it could save you a fortune. I don't want you to pay unnecessary fees to IFAs. I don't want you to pay fund management fees to people that habitually underperform the markets.
I want you to take control of your own savings and offer you what I think is the most efficient way of investing your cash. I want to show you how you can get the professionals to manage your cash, but at a fraction of the cost you'll pay through the traditional route.
Taking control of your own retirement fund
Sipps have the normal tax advantages like other pension schemes. The basic idea is that you get your income tax back on any contributions, but then you pay tax when you draw the money as your pension. While the cash is invested, capital gains are tax free and dividends are only taxed at the basic rate of tax.
Different providers offer a broad range of services, but I'm going to focus on the 'execution-only' SIPP. That's the simplest and cheapest type where the provider doesn't give you any advice on your investments.
My online SIPPlooks much the same as my online stockbrokers account. On the face of it there's little difference. I can buy and sell just about anything I want, including shares, bonds, warrants, unit trusts, OEICs and ETFs. The charges are much the same, too, at around £10 a trade with no annual fee.
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I've got total control of how I make my investments and I can get a valuation anytime, so I can keep a close eye on my fund.
The major difference is getting your money in and out of the account. With it being a pension fund, there are tax implications, but don't get bogged down by that. Let me explain roughly how it works.
First, getting money into your account.
You can pay in a large chunk of money, or drip feed monthly amounts by direct debit. The provider will normally get the tax back from the government up to the basic rate of income tax. For higher rate tax payers, you have to claim your tax back on your self-assessment form.
Your employer can pay money in too, and because they can make the contribution before they pay your tax (i.e. gross), then there'll be no need to reclaim the tax later. Of course, you'll have to talk to your employer to set this up.
Now, if you've already got a DC scheme (it has to be a recognised UK pension) that you want to move into a Sipp, then that shouldn't be a problem.
If, like me, you've amassed several schemes over the years, it may be useful to bring them all together in one place. This way you can tidy up your affairs and cut down on administration too.
You'll probably have to sell the investments within existing schemes and transfer over the cash. The previous provider may demand a fee, so you'll have to weigh up the pros and cons. Find out how much the existing provider charges annually and the fees on the investments you hold within the fund. It may well be worth paying a one-off fee to regain control of your assets.
Secondly, let's look at taking your money out.
You can start to draw down' your fund between the ages of 55-75.
One of the best benefits of a pension is that once you're 55 you can take 25% of your fund tax free (subject to certain caveats). This is great because you'll have had your tax back on your contributions (and had the benefit of putting it to work in the markets) and now you can get a quarter of the whole fund tax free.
The provider usually charges a fee for 'draw-downs', so it's worth checking them out. But remember, you can always transfer away from the provider if you're not happy with their service, or their charges.
You control what goes in, you control how it's invested and you control how it comes out. So you are taking on the risk. This may worry you. You may think that you're not a professional and you don't feel comfortable with managing such an important part of your retirement savings. But let me remind you: with any DC scheme, you're taking on the risk anyway. If the fund doesn't pay out what you're expecting and you've abdicated responsibility to the pros, you could end up sorely disappointed.
To make the most out of your pension, we need to get fees down and make sure the investments perform well too.
This article was first published in the free investment email TheRightSide
P.S. Risk warning:SIPPs may not be the best savings plan for everyone.
If you've got any doubts, make sure you talk to a qualified person before you take any major decisions.
If you're lucky enough to be in an occupational scheme (where the employer pays out a proportion of your final salary), then there'll have to be good reason to cash it in and put it into a DC scheme. A SIPP probably isn't for you.
If you need to keep access to your funds, a pension is probably not the best place for your savings. There are big penalties for taking your money out early.
If you're at all unsure about tax implications, then you should talk to an investment professional. That could be a personal accountant, or an IFA.
My suggestion is to pay for independent advice to make sure your savings are heading into the right sort of savings vehicle.
The FSA has an advice centre which may be worth a visit. You can find out more here: www.moneymadeclear.fsa.gov.uk
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Theo Casey. The Right Side is issued by MoneyWeek Ltd. MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798. https://www.fsa.gov.uk/register/home.do
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