If you are in the U.K and have worked to get a sizeable pension, you have the option to SIPPs the pension.
First of all, we will go over the positives of a SIPP based pension then the negatives and go over the cost both in the U.K and offshore.
What is a SIPPs
SIPPs is retirement option wrapper that holds investments until you retire and drawdown. The main advantage is that you have the flexibility over the investment options and both the other way around where the provider has the investment options.
For example, when you have a pension with company X, it will be pooled together in investments, these are normally safe but have lower returns.
With a SIPPs, you can choose the investment options within the regulation to what you can invest in.
Who is a SIPP for?
A SIPP is for anyone that wants more flexibility over the investment option in their pensions.
Why would you want this?
Well, if you look at world pensions schemes, Aus Supers, 401Ks, and see the investment return on these they usually have 5% (from what I have come across) but with the average U.K pension that I have personally come across is doing 2-3% in a company scheme when you factor in U.K inflation that is targeted at around 2% it is hardly keeping up with inflation. This is to keep the members safe and they don’t lose money. They mainly invest in safer fixed interest bonds rather than equities. This is not a bad thing as many have lost their pensions in funds through risky or volatile investments.
What if you want growth in your pension?
For example, you’re a 30-year-old your investment time frame is at least the next 25 years and more until you retire. If you had the effect of compound interest getting higher returns on your pension let’s go for a moderate portfolio 5% return. Your final balance with £30,000 investment would be over 25 years £119,326 over this time at a rate of 5%.
While if you were getting 3% it would work out £74,601 over the same time frame, a difference of £44,725 this could be an extra two years in retirement.
If you look at this from a retirement, objective as well the average U.K target pension pot is said to be £355,000 on a survey by Pensionwise U.K. But in reality, they noted that you would need a pension, in the region of £903,000 to get by on an inflation impacted £20,000 a year when retired.
With final salary’s all but gone this means the pensions and saving amount needs to be equated. Although, most employers are doing what is required and above to meet the U.K. pension legislations with the total amount of 8% of your salary, (you paying 5% and your employer paying 3%) although many are higher than this. It means in the U.K the average salary of £28,550 saving £2,284 now let’s say that over your lifetime your earnings increase and the average amount that you can manage to save through your 35-year work life would be £5000 (this is not official norms it is just a rough estimate of what the average person will put way through private pensions through a course of a lifetime). This would give you with the non-inflation adjusted pension pot of £311,379.72 still a way off the £903,000 for the average retirement (although you more than likely have ISAs, and other savings). If you take the same income and say that it did an average of 5% over 35 years with the same investment would be £474,181.61 a £162,801.89 increase over the lifetime this is an increase of over 2%.
The reason for SIPPs is that you can have more flexibility and control of your second biggest asset and invest it to get potently higher returns.
What are the positives?
- More flexibility
- Potentially higher returns
- Choose investments
- Choose your own provider
What are the negatives?
- Potential to lose money
- Get an advisor who charges to much
Is it riskier than leaving it with the provider?
I have been asked this many times and my reply is; if you are getting properly managed you should go through a risk questionnaire to develop the appetite of your level of risk and then correlate an investment portfolio to match the risk level and needs. So it can be tailored to your risk level
What are the platforms in the U.K and the fees for DIY?
Hargreaves Lansdown
Charges 0.45% of anything under £250,000 and anything over it has 0.25% going to 0.1% for anything over half a million and no charge on anything over 1 million.
This has a wide funds selection is voted one of the top SIPPs providers
Nutmeg
It helps you invest in one of its select portfolios so you don’t have to choose.
Fees 0.75% for anything under £100,000 and 0.35% on anything over £100,000.
AJ Bell
It has the lowest fee of 0.25% of anything less than £100,000 0.10% on anything over. Any amount over 1 million is free.
Good fund option nationwide service.
Vanguard
Charges 0.15% a year what is capped at £375 a year it also has no exit charges. The lowest cost provider.
Investor interactive
This is for those with £60,000+ and want little or no changes to the portfolio, it comes with a few options ranging from £9.99 to £19.99.
There are a range of options available in the U.K if you are wanting to do DIY investing. We just ask that before you start you do your own due diligence and research.
I was reading the FT advisor last week where they sent a financial journalist, out to find the fees in platforms for SIPPs she had 25 years of experience and spent 50+ hours on this and quote “made her drink gin every night” trying to figure this out.
Basically, advisors don’t want you to look at the fees as you pay for advice that I get but also how are you supposed to figure this out if the experts can’t. You will have to go shopping if you want advice but I do know from looking at numerous reports from different companies in the U.K that they can vary significantly, but the average seems to be 1.25% all-in for the platform, and advisor fee and 1% initial. That I will stand up for and say it is reasonable if you are getting good advice. So if you are looking for advice on your pension look for it around this guideline.
If you are looking to set a portfolio please refer to my guide on how to create and research your own investments Click here to see an article that will help you.
Secondly, once you have understood what to look for, where to find and how to create it, look here on how to create that portfolio. Click here to see my article on how to create a portfolio.
What if you are offshore as an expat?
Well, I would refer to my guide on Offshore Pension Plans For Expats. Click Here to see the article for offshore pension plans.
Conclusion
In short, it can be more expensive for the fees and many of the platforms don’t have to declare their fees. Although this is changing they do have some use if you are looking for ITA reduction if over the nill band rate of £325,000 and if you are over the lifetime limit £1,055,000.00, also it depends on your jurisdictions, some countries have agreements to role over in the countries pension fund such as Australian Super.
In short, a SIPP is a great option if used right, but it is on an individual basis whether to transfer your pension into a SIPP on the value, your situation.
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If you have any questions about pensions as an expat, whether that is onshore in the UK or offshore in another country or platform, please email me at info@investmentsforexpats.com
