Pension investors are moving from life insurers to low-cost Sipps – should you?

by Faith Glasgow from Money Observer |

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Research shows four of the top five most common sources of pension transfers are life companies.

The competition for self-invested personal pension (Sipp) business may be most intense between online investment platforms battling it out over charges and customer service, but research by interactive investor (ii) shows that the bulk of Sipp transfers are coming from pensions run by life insurance companies.

The research shows that of the five most common sources for pension transfers to the interactive investor Sipp, four are life companies, with Aviva, Scottish Widows, Standard Life and Aegon taking second to fifth place respectively. The single most common source for transfers to ii is broker Hargreaves Lansdown. 

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The number of personal pensions held with life companies reflects changes in pension choices over the past 20 years, as final salary pensions have declined and ‘pot of money’ pensions have become more widespread and important.

Personal pensions from life companies have been around since 1988; stakeholder pensions with a 1.5% cap (for the first 10 years, falling to 1% thereafter) and low minimum contributions were introduced in 2001 to help those on lower earnings, but they tend to offer a pretty limited choice of investments.

More recently, many workplace pensions offered by employers are effectively personal pensions run by the insurance companies. These are capped at 0.75%.

The personal pensions being transferred to the ii Sipp are mostly older, ‘dormant’ contracts from previous jobs. There are several reasons why it may make sense for those who have accumulated personal pensions from different jobs over the years to pull them all together in a single Sipp.

First, Sipps offer a wider choice of investments than insurance company pensions. Not only can investors choose across the whole of the market as far as funds are concerned, rather than a personal pension’s generally limited range, but they also have the option of investing in investment trusts, ETFs and individual shares as well.

Second, it is easier to monitor and manage your pension when it is invested in one place rather than spread across a number of small pots.

It is also easier to see which holdings are thriving and which are performing poorly – and to take action if need be.

Finally, online Sipps are cheaper than personal pensions, as the table below shows.

Please click here to see larger picture of tables

Source: the Lang Cat, as at May 2020 

 

To clarify the disparity, the lang cat, a financial services consultancy, carried out research into the differences in product and investment costs of old life company pensions and modern Sipps, and the potential financial impact on a pension over a 20-year term.

It used a combined product and investment charge of 1.05%, in line with a 1990s-era personal pension.

A 1.05% charge on a pot of £150,000 with an ongoing monthly contribution starting at £200 and increasing each year in line with inflation would mean total charges of £55,176 over the 20-year term. 

The total product and investment cost for an ii Sipp, with a monthly service charge of £19.99 and an aggregate annual investment charge of 0.77%, which is representative of an actively self-managed portfolio, would be £47,080. 

That’s a difference of £8,096 in charges. If that money were invested over the 20-year period and saw annual investment growth of 5%, the total pension would be worth almost £14,400 more.

However, Sipps won’t be right for everyone. You have to be prepared to manage your own portfolio or pay someone else to, if you’re planning to take this route. Not everyone has the time, confidence or inclination to take the DIY route.

It is also less likely to make sense for anyone on a final salary pension.

Think you want a final salary pension transfer? Think twice

In addition, it is important to check the details of any ‘pot of money’ pension you’re thinking of transferring, as some dating back to the 1980s or 1990s come with very generous guaranteed annuity rates (GARs), typically of 9-11%. A typical annuity on the open market for a healthy 65-year-old in June 2020 is around £4,700.

To put that into perspective, a £200,000 pension pot with a GAR of 11% would pay out a secure annuity of £22,000 a year for life. An open market annuity would pay out just £9,400.

Additionally, some of those begun before April 2006 may allow you to take more than 25% as a tax-free lump sum. 

Steve Nelson, consulting director, the lang cat, says: “There’s no question that some of the older style defined contribution pensions have much higher charges in comparison to many Sipps available today. It’s a relatively simple case of arithmetic to work out the considerable savings you could make by opting for a newer, cheaper pension product.

“What’s not so straightforward is tracking down all the various pension pots you’ve accumulated over your working life. But if you do decide to do that and bring them all together, you’ll be able to work out how much is going into the coffers of some very large pensions businesses, instead of working hard for you. You might well be amazed.

“Just remember that some of the older style pension plans come with valuable guarantees, so tread carefully before making any rash decisions.”

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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