Is a Sipp my best investment option?

17 January 2020

At age 36, our reader asks if he should invest directly in Vanguard funds or continue to do so via his SIPP

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I’m 36 years old, self-employed and have opened a Sipp with Hargreaves Lansdown. I’ve mostly been buying Vanguard Global ETF index funds and global bonds. Through this pension, I get the 25% top-up from tax relief on pension contributions as well.

But would I be better owning the funds direct with Vanguard? Vanguard’s fees are very low and every time I buy with Hargreaves there is a charge, as well as other fees I may not be aware of.

Does the tax relief benefit outweigh the fees that Hargreaves charges?

I am also wondering whether I should keep a smaller amount of these funds direct with Vanguard, so I can access them if I want an earlier retirement. What would you suggest?

Initial diagnosis

The good news is that you have made an excellent start on your savings journey by taking advantage of the benefits offered by pensions, says Craig Palfrey, certified financial planner at Penguin, a Cardiff-based wealth management firm.

“The 25% return you are getting on the pension contribution - the equivalent of 67% if you become a higher-rate taxpayer in the future – is certainly worth taking advantage of and, in theory, should outweigh any charges that are incurred.”

But he suggests if you are concerned about the charges you pay, that could be a reason to review how you are currently investing and potentially consider a change of provider.

He also raises the question of whether a Sipp is appropriate at this point in your savings journey, as you may be paying for additional features you don’t currently need.

Treatment plan

Start by reviewing your choice of Sipp and whether it is the most suitable type of pension for your needs.

“For most people, a personal pension will provide access to all the funds they could need,” says Palfrey. “A Sipp is really only for those who are using their pensions to buy direct shares in companies or buying commercial property.”

However, not all Sipps charge more despite offering greater options, so you may not end up paying more for features you are not using at this stage.

Also, if you were to buy funds direct from Vanguard you would lose the advantages of saving through a pension, warns Mike Barrett, consulting director at Edinburgh-based the lang cat.

“Vanguard has been planning to launch a Sipp as part of its direct offering in the UK, but this is yet to happen,” he points out. “As a result, if you invest with it now you’ll be forgoing the tax relief available for your Sipp contributions.”

Alternatively, you could buy the funds through an Isa, using an investment platform.

“You would not get the 25% tax-free cash if you did that, but you would have access to the money should you need it,” says Palfrey. “You could also add it to a pension later down the line, subject to your allowances.”

If you invest through a platform, there are ways you can keep costs down. But it would mean working out the total cost of investing and knowing the amount you are investing and how often you will be trading.

“Over the long term, these charges can have a huge impact on your overall returns, so it’s important to make sure your costs are as low as possible,” Barrett observes.

“Ask the platforms themselves to explain their charges to you and how much it will cost to invest.”

It is also worth paying attention to whether your investments are well diversified. In other words, that you don’t have all your eggs in one basket.

“It’s great that you have looked to spread the risk, but I’m not sure if it is diversified enough and you could maybe make a change there,” suggests Palfrey. “It might be that having fixed-interest investments in your portfolio isn’t necessarily right for you at this point, for example, given your young age and time to retirement.”

The exact balance of your portfolio depends on factors such as your appetite for risk, and Palfrey believes it is worth paying for professional advice to discuss your investment goals and what you want from your pension. He recommends that if you don’t seek advice, you should try to rebalance your funds at least once a year.

“Over time, your investments will become bent out of shape because the underlying performance will mean that if you have bought 50% in each of the funds you mention then at the end of year one there could be 60% in one and 40% in the other,” he explains.

“Rebalancing would take you back to your original 50/50 holding. Over the long term, this will add real value to your total returns.”

Jeff Salway is a financial writer for publications including Money Observer.

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