If you look at the true cost of running your SIPP, you might be in for a shock
Towards the end of this article is a useful table you can use to work out exactly how much your money needs to grow by each year for your SIPP to break event
It’s A Bit Like Running A Business
You wouldn’t open a shop to sell sweets without thoroughly checking your costs. Rent, rates, staff, loan interest, fixtures, fittings, repairs, maintenance, utilities, theft, tax, and so on. The costs could add up to such a big number, you’ll have to sell sweets to half the county to make a profit!
Unless you know exactly what it costs to run your SIPP, you can’t begin to select investments. Consider this. If it costs 4% per year to run your SIPP, and you only earn 3% per year on your money, you’re going backwards. Unless you cut your costs, or select investments that earn you more than 4% per year, your SIPP ‘business’ will run in the red.
And that's no use at all for your future income prospects!
Your SIPP could be exposed to a number of costs.
The Cost Of Financial Advice
It’s not a requirement to employ an independent specialist pension adviser. It’s a ‘self-invested’ pension, so you could ‘do it yourself’. Generally speaking, though, you’ll have to stick to stockmarket investments. For as soon as you move into the more interesting world of things you can do outside of the stockmarket, like you’ll find on SIPPclub, almost every SIPP operator will require you to take advice.
Actually, it’s my belief you should always take advice. Pension specialists have to be highly qualified for one simple reason. Pensions are complicated. Unless you’re a professional investor, or you have many years of experience, you can lose a fortune doing your own thing. And I’m not just talking about a few quid here and there.
Financial advisers used to be paid commission. But since 2013, they now charge fees, in one of three ways:
1. Percentage Fee
On average, it costs 3% to 5% of the fund value for advice. And around 1% to 1.5% per year for annual servicing. If you have a reasonable sized fund, paying by a percentage can cost you dearly. Rarely does it bear any relation to the actual time spent working for you.
2. Fixed Fee
Agreeing a fixed price for advice can be really cost effective. In fact, the larger your fund, the better the deal. Fixed fees can be expensive for smaller funds. But if you have a small fund, chances are you shouldn’t have a SIPP.
3. Hourly Rate
It’s arguably the fairest charging method of all. You simply pay for the time spent on the job, and no more. It’s how other professional advisers are required to work, like lawyers and accountants.
The Cost Of Running Your SIPP
In the main, SIPP operators tend to charge fixed fees, depending on the work you want them to do. If you limit the range of investments within your SIPP, the costs can compare favourably to other types of pension. They can even be cheaper than individual arrangements like personal pensions that levy charges on a percentage basis.
However, if you spread your SIPP money across a range of loans, investments and property, you could find that fees will suck out a significant proportion of the profit you generate.
Fund Charges Associated With Stockmarket Investments
If you hold stockmarket investments, especially a range of funds, you could bump into all manner of charges. Whilst they all should be made really clear to you, many are hidden. It can be so complicated, most people can’t be bothered to check. And that’s often a costly mistake.
The regulator is currently asking all dealing services to be transparent in their charges. It appears that some are squirming at the realisation the true cost of their service will soon be out. In fact, the largest has just deferred the decision until next year. I wonder why!
Rob, a SIPPclub member, told me he’d recently moved his sizeable SIPP away from the largest fund supermarket, saying: “The ‘incredibly low cost service’ this firm bangs on about can’t possibly be that cheap, as it’s made its two original founders billionaires. Switching my SIPP to an operator with fixed fees will save me a lot of money.”
Inflation – The Biggest Cost Of Them All
Inflation has always been used as a method of taxing you without your knowledge. Governments love it as it devalues the national debt. It happens so slowly, you don’t notice. No forms to complete. No taxes to add up. But it costs!
Inflation reduces the buying power of your money. So you become poorer even if you have the same amount of money in your SIPP. Here’s the point. If your money is growing slower than the rate of inflation, you might feel happy that you're making a bit of money, but you are becoming worse off!
Here’s a table showing the UK inflation rate in the last five years. You’ll see two periods where the rate was over 5%. If your money isn’t growing quicker than that, you have a problem!
A Word About Tax
Technically, this isn’t a cost, but it’s worth a mention. Pensions always grew free of tax, until Gordon Brown had a go at them. His removal of tax credits on share dividends back in 1997 has been estimated to have cost pension funds a staggering £150 billion.
If you have money in stockmarket investments, tax is reducing your return. Thankfully, loan and deposit interest, and property growth remain tax free.
How Much Do I Need To Earn To Break Even?
If you’ve ever looked at your annual pension statement and felt your pension fund should be doing better, this should help to explain it.
Find out what you’re paying in fees and charges. Express fixed fees and hourly rates as a percentage of the overall size of your SIPP. Then pop the percentages into the table below, add up the column, and you’re done.
Are You Winning Or Losing?
Now you know the amount of growth you have to make in your SIPP to break even, check out how your money is performing.
If you’re holding cash you’re not about to lend or invest or draw as income, then you’re in big trouble. You’re probably earning less than 0.5% - incredibly 0.1% is quite normal. That’s bound to be much, much less than your break even percentage.
Stockmarket growth hasn’t achieved much more than 5% to 6% as you can see here in the article called A Secret To Growing Your Pension. Are you making enough on your stockmarket investments to break even?
For some years, loans have been a great way to achieve a return of 10% or more. With banks not lending like they used to, it’s not surprising many SIPP holders are filling the gap and becoming profitable lenders.
Read The Smallprint And Discover All Your Charges
Work out what it’s really costing you to have a SIPP. Then invest your money accordingly.
Remember, it’s ‘self-invested’. If you don’t check your charges, you’ll only have yourself to blame if you find out years down the line you’ve not been breaking even, and you don’t have enough money for your retirement.
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk. Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.
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