WITH Britain’s traditional pensions model in crisis, more savers are opting to take full control of their pension. The latest data available from the Office for National Statistics shows that assets in self-administered pension funds grew from £620.4bn to £927.7bn between 2002 and 2008 and their total income was £61.6bn last year.
This growth has led to a more competitive market for managing these funds, many of them targeted at Self-Invested Personal Pensions (SIPP). AT Kearney’s Penney Frohling says: “If you do your homework you can keep your costs fairly low – there are many incredibly cheap funds out there. But keep your charges as low as possible because all of them eat into returns.”
When it comes to fees, even small annual costs can make a huge difference. Any percentage management charge is taken annually as a percentage of the fund’s total value, so £100,000 with a 1 per cent fee will incur £1,000 in costs each year. And you are also losing what that cash would have made if invested.
As the chart below shows, self-administered pension funds in the UK (of which SIPPs are a subset) spent just over 6 per cent of their expenditure on admin fees in the first half of this year. This includes not just management fees (known as the annual management cost or AMC), which were formerly the favoured measure of costs, but brokers’ and transfer fees and other commissions. SIPPs allow you to invest in a huge range of asset classes, but doing so can often incur extra costs, whether in transactions or management. By contrast, conventional stakeholder pensions, whereby your employer contributes but you run the fund yourself, are only permitted to invest in certain assets, but managers cannot charge over 1.5 per cent in fees.
When assessing charges, investors should look at the total expense ratio (TER) instead of the AMC. The TER includes all ongoing operating costs – legal and auditing fees as well as management charges, and can be tens of basis points higher than the AMC. In addition, Vanguard’s Peter Robertson points out that there can also be extra costs if your fund has a high turnover rate. Each time you complete a share transaction on an exchange, for example, you pay 0.5 per cent in stamp duty. If the fund has an annual turnover rate of 50 per cent, that’s 25 basis points extra in costs, which in addition to a TER of, say, 1.6 per cent, increases costs to 1.85 per cent.
SIPPs also have a set-up cost, usually around £500-£600. And hiring a discretionary manager to stock pick can make costs rise quickly. BestInvest’s Andrew Lowcock says:
“It can be 0.7 per cent or go much higher, say to 3 per cent. On top of the other charges, it adds up.” And if the manager herself invests in fee-paying products or other funds, you will pay an additional layer of fees.
Fees should not be a deterrent to taking control of your pension, but ignore them and you could find your savings frittered away at an alarming rate.