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Similarly, if your occupational scheme is set up as a defined-benefit or final-salary fund — check the annual statement — then you should hang on to it as a low-risk way to fund retirement. You won’t need to worry about investment returns or annuity yields. The only exception would be where you fear your employer might go bust or default on its pension promises.
Most private-sector schemes — including all personal plans — switched to a defined contribution or money purchase basis years ago. However, it’s worth noting that everyone — including members of both types of occupational pension — has been allowed to also contribute to Sipps for nearly a decade. So sticking with the firm or going DIY is not an either/or choice; you can do both.
If you read the annual statement all pension funds must issue — and that single act will make you better informed than many members of a newspaper scheme where I used to be a trustee — you will see total returns, usually shown on a calendar year basis. You can compare these with the relevant stock market index or fund performance figures available free online from independent statisticians including Bloomberg, Morningstar and Trustnet. Try not to focus on just one year’s returns and consider at least five years; the longer the better. Also, make sure you compare like with like. Most pensions are managed funds — or a mixture of shares, bonds and property — which is likely to produce lower volatility and returns than pure equity strategies based on the FTSE All-Share or other global indices. Finally, remember that your employer may well pay the company scheme’s costs, but is unlikely to do so for a Sipp.
There is no initial charge to set up a simple Sipp with many providers, including Alliance Trust, Fidelity, Hargreaves Lansdown, James Hay and Zurich. After that, annual charges might be determined in cash terms — up to £275 at Alliance or £200 for Prudential’s fund Sipp — or a percentage of the assets under management — such as up to 0.35 per cent at Fidelity or 0.45 per cent at Hargreaves.
However, these figures give only an outline of the total cost of running your own retirement fund. This will be determined by which assets you hold and how often you buy or sell. For example, Hargreaves Lansdown charges frequent traders as little as £5.95 to deal online in equities — including overseas shares. It also places a cap of £200 a year on annual fees for Sipps holding shares — including investment trusts — while there is no maximum limit on annual charges for unit trusts or open-ended investment companies. That makes shares much cheaper to hold than funds for bigger pensions.
You can see more details about a comprehensive variety of Sipps in Money Management’s special survey of April 2014, or go online to InvestmentSense.
Many providers set low or no minimum initial investment to start a simple Sipp, holding mainstream assets — such as shares, bonds, cash or funds — without financial advice. This is may be the best option for most people who feel able to run their own retirement fund.
Alliance Trust — where I used to be a client before Scottish nationalism forced me south of the border — sets the bar at £50. Aviva — another provider I left, due to baffling paperwork — and Fidelity require £1,000. Hargreaves Lansdown — where I am currently a happy client — has no initial investment minimum.
If you want to hold more exotic assets — such as hedge funds, overseas currencies, agricultural land and gold — expect higher minimum investment limits, such as the £50,000 required by Barnett Waddingham.
You don’t need to go completely DIY when deciding what to buy or sell in your Sipp. In addition to many of the companies named above, wealth managers including Brewin Dolphin, Charles Stanley and Killik offer various degrees of advice and managed Sipps. As you would expect, the latter option costs more. For example, Charles Stanley’s annual management charge is £250 for a basic administered Sipp or £550 for a wider range of assets — including property — and fees range between 0.5 per cent and 1.25 per cent.
It is important to be aware that DIY pensions or Sipps will not suit everyone. When share prices fall and your pension shrinks you will not be able to blame some City suit: the idiot responsible will be staring back at you in the mirror every morning.
While people still at work can take the long view of such setbacks, it will be more difficult for pensioners who are investing irreplaceable capital. That is why many people entering retirement should continue to buy annuities.
But the fundamental appeal of Osborne’s revolutionary idea — or ‘pensions for the people’ — is that it gives us freedom to choose how we manage and spend our life savings. I enjoy several hours a week doing so. That’s less than many people devote to following a football team and a lot more rewarding.
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