Are you paying too much for your DIY pension?
If you have a DIY pension, keep an eye on the fees, says David Prosser.
If you have a DIY pension, keep an eye on the fees.
The government has unveiled an investigation into pension charges. The inquiry, due to report in September, reflects concern that many savers have little idea about the costs they're racking up due to the lack of transparency in pension products. This is especially true of self-invested personal pensions (Sipps), which have become increasingly popular in recent years.
Sipps were originally designed for sophisticated investors who wanted to take direct control of their pension investments, often dealing in unusual asset classes. They are now more or less a mass-market product, but not everyone who uses one is fully aware of what they're paying.
Comparing products isn't easy
The problem with Sipps is the sheer range of charges. You should expect to pay a yearly fee for the plan itself. This is often known as a platform charge if you are managing your Sipp online through a fund supermarket. You will also pay annual charges on the funds you hold inside your Sipp.
Then there are dealing charges, levied each time you buy or sell investments inside your Sipp. These are often payable whether you're trading in funds or individual shares. In addition, many Sipps charge entry and exit fees, due when you transfer funds from or into another pension arrangement. Finally, if you're using your Sipp for income drawdown, expect additional charges. You will typically pay an initial set-up fee, and then annual fees as the process continues.
Comparing charges isn't easy, because providers levy their fees in different ways. With platform and fund charges, you might incur a fixed cash fee, or a charge that is a percentage of the assets held. For people with larger funds, the former are more affordable; but savers with smaller sums will be better off with percentages.
Similarly, dealing charges can make a big difference to the total cost of a Sipp. If you're the kind of investor who will buy and hold investments for the long term, you should pay less attention to these fees and focus on annual charges instead. But if you trade regularly, dealing charges may be a much more significant proportion of the total amount you pay, and so you will want to go for lower dealing costs.
Given these variations, it's hard to recommend best-buy Sipps. But the MoneySavingExpert comparison site suggests that AJ Bell is a good place to start for savers with smaller sums, while Hargreaves Lansdown offers good value for less experienced investors and those entering into drawdown. For larger pension funds, it suggests Interactive Investor.
Know your Sipps
The first Sipps were specialist arrangements for investors seeking access to the most comprehensive range of pension investments. Many savers used the plans to invest in commercial property, sometimes linked to their business interests. It was also possible to use Sipps to invest in more exotic assets, including unquoted shares and commodities.
The rules haven't changed, and some savers do still use Sipps in this way. But most of the plans available from well-known providers won't allow you to hold such assets. Their products are often described as "low-cost" or "lite" Sipps. That's not a problem if you're not interested in using Sipps for a wide range of unusual investments, but if you are, you will require what is known as a full Sipp.
Bear in mind that these more sophisticated Sipps come with high charges to match. For this reason, don't open this type of Sipp unless you really need it. You will also almost certainly need independent financial advice to make the best use of such arrangements.
Tax tip of the week
It is useful to be aware of all of the different situations in which you can give money away without having to worry about it attracting inheritance tax (IHT). In addition to your annual exemption of £3,000, and the ability to give wedding and civil-partnership gifts, small gifts, and regular gifts from income, there is no IHT due on gifts that are put towards helping certain people with living costs.
This applies where the person is an ex-spouse or partner, a relative who is dependent on you because of disability, illness or old age, and children (including step-children and adopted children) who are under 18 or still in full-time education. So this could include the payment of their accommodation costs at university, for example. Finally, note that gifts to political parties, charities, museums, community amateur sports clubs and universities are also not liable for IHT.
Employers dodge auto-enrolment laws
The Pension Regulator is now investigating 100 complaints a month about employers accused of not meeting their responsibilities under the auto-enrolment regime.
The law on pensions is crystal clear. All employers, even if they have just one member of staff, must make an occupational pension scheme available to their staff. Unless they've specifically opted out, employees should automatically be enrolled in the scheme. Employers now have to make contributions worth 2% of employees' pay into their schemes, with employees expected to add 3%, including tax relief.
However, cases of employers falling short are widespread, say financial watchdogs. Some employers have failed even to get schemes up and running. Others are applying pressure on employees to opt out. There is also increasing concern about the administration of schemes, with employers accused of paying the wrong amounts into staff pensions; these may be mistakes, but employees are nonetheless being short-changed.
It's therefore important that all employees understand their pension rights and check regularly that the correct pension contributions are going into their savings. If you work for a small or medium-sized company that didn't have a pension scheme until auto-enrolment came along, this is even more important. If in doubt, see ThePensionsRegulator.gov.uk for advice.