Pensions: Vanguard sparks a Sipp price war

published 17 December 2019

Crowd of shoppers peering through closed glass doors © Getty Images — Falling costs are about to spur interest in Sipps

Next year Vanguard, the world's second-largest fund manager, is launching Britain's cheapest private pension to date, "throwing down the gauntlet to its competitors and fuelling expectations of a price war", says Emma Agyemang in the Financial Times. The self-invested personal pension (Sipp) will have an annual administration charge of 0.15%, capped at £375. That is far below the industry average of 0.35%, says independent analyst Platforum. There will also be no additional costs for exit fees, valuation statements or transfers.

Vanguard says the Sipp will initially only be available to people who are building up their retirement savings, not those that have already started drawing on them. A pension drawdown service is expected to launch in the next tax year. Someone putting the full £40,000 annual pension allowance into the Vanguard Sipp would pay £172 a year in charges. The same amount in a Vanguard fund held in the most expensive platform's Sipp would cost up to £400 a year.

"Compounded over decades of pension saving, these fees can add up," says Louise Cooper in The Sunday Times. A 43-year-old investing £40,000 for the next 25 years would save almost £10,000 with Vanguard's Target Retirement fund if invested with Vanguard's Sipp instead of a higher-cost platform.

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Two years ago Vanguard introduced an Isa and investment platform "credited with starting a price war that has forced [rivals] to push down their costs", says Cooper. "The Sipp, which promises to let savers sign up in just ten minutes, could shake up the market again by forcing another reduction in costs."

Vanguard's funds are cheaper too

There's more good news. Vanguard has some of the lowest fund fees in the industry. A typical Vanguard fund comes with an average fee of 0.2%. Hargreaves Lansdown, the biggest investment platform, charges an average fund fee of 0.94%. Note too that the account-fee cap applies across all the products you hold with Vanguard, whether that's a Sipp, Isa, or a general account.

The drawback to the Vanguard Sipp is the choice of funds. "It only offers a limited own-brand selection," notes Jayna Rana on This is Money. Hargreaves Lansdown charges more a 0.45% management fee plus fund fees and some dealing charges but offers a full range of funds, investment trusts and UK and international shares.

Some investors will pay more in order to get access to a far wider choice of investments. But the success of Vanguard's Isa shows that many will opt for a limited selection in return for low and clear charges. "Most pensions cost more and [have] complicated fee models," Holly Mackay, founder of Boring Money, told the Financial Times. "This one is cheap and simple... unusual... in financial services."

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Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings accounts and credit cards to pensions, property and pet insurance.

Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.

Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping, among many other titles both online and offline.