My 30-year-old daughter has no pension provision. She is about to receive an inheritance and I would like to advise her to invest in a self-invested personal pension (Sipp).
After studying a vast range of articles and performance tables, I am still unclear as to whether the 20% tax add-on from the government will compensate for the fund charges.
Tables suggest that the charges will take away, after 25 years, a similar amount to the government assistance – and when the pension is drawn most of it is taxed.
Unless you can advise otherwise, I think I am best investing her inheritance myself, as I now do. I am 72 and will be leaving her around £300,000. Her inheritance is invested in a variety of funds, many of which are constituents of model Sipp portfolios.
Is a Sipp worth it or will the fees destroy the benefits?
Firstly, you need to be aware that there is a limit on how much money you can put into a pension and obtain tax relief on.
The annual limit is £40,000, or lower if your daughter’s earnings are less than £40,000. For example, if your daughter earns £25,000 a year, that is the maximum that could be paid into her pension that year. If you go over this limit, you will be penalised with an annual allowance charge. Your daughter may be able to carry over unused allowances from the previous three tax years, but you will not be able to invest her entire £300,000 inheritance in a pension.
You talk about investing the money into a Sipp, but this may not be the best pension scheme to choose.
You can invest in a whole range of investments via a Sipp including shares, funds and commercial property, to name but a few. You are correct that a Sipp generally carries higher management charges than ordinary pension arrangements due to their investment scope and the necessary increased reporting and management required.
I would be asking the question as to whether a Sipp is indeed required in your daughter’s circumstances as if she only intends to invest in funds and shares and not specifi cally commercial property, then other types of lower-cost pension arrangement are likely to be more suitable for her.
The alternative pension options that could be considered are a stakeholder pension, where charges are capped at a maximum of 1.5% a year for the first 10 years and 1% thereafter, but fund choices are likely to be very limited.
Increased competition in the market has resulted in a new breed of pensions offering broader, more modern fund strategies at very competitive costs, in many cases much cheaper than a stakeholder pension.
For example, LV Personal Pension account has a wrapper cost of 0.25% a year for a £300,000 investment.
You would also pay the investment annual management charges on top, but these could be kept low by choosing passive investments such as those held within the Vanguard LifeStrategy fund range with charges of 0.22% a year.
Alternatively, your daughter could build her own pension portfolio via a Sipp. For example, Hargreaves Lansdown’s wrapper cost for a Sipp is 0.45%, and, again, you would pay investment costs on top of that.
I would suggest that pensions are very worthwhile having but the key to success is fi nding a plan with the features that meet your needs at an appropriate cost and avoiding overpriced plans offering all the ‘bells and whistles’, which you will never need.
Moneywise says: The examples of the fees cited by Angela show that costs can be kept very low and shouldn’t wipe out the investment returns. If you’re investing in the stock market over at least 10 years, you could expect to get average annual returns of 5%.