I know so many busy people for whom a pension is yet another itch to scratch. The guilt and fear is palpable. Even thinking about trying to save the money is agony – an unbearable imposition that threatens to bring down their house of cards.
Behavioural economist Shlomo Benartzi has an explanation for this. His Save More Tomorrow [1] programme offers one possible pension saving solution that won’t rub up your cerebellum up the wrong way:
Save More Tomorrow is not commonly practiced in the UK, however, so it’s time to get our own plan – one that’s better than sticking a large wodge on a rank outsider at Chepstow racecourse when you hit age 65.
[2]
Following on from my reader-inspired research into financially challenged investing [3], I wanted to track down the cheapest pension available to someone who can only dream of shoestrings.
Important: If your employer will match your pension contributions in a company-run scheme, then you should probably snatch its hand off. To not take that money is like handing back a chunk of your salary every month!
Dirt cheap SIPP
Assuming you want a DIY pension scheme, then it needs to be a flexible, low cost vehicle that can put you on the right track while accommodating small contributions.
We’re looking for the cheapest pension that delivers:
- Low fees: Church mice can ill-afford to lose cheese to charges [4].
- Low cost index funds: Passive investing [5] offers the opportunity to earn market returns, mostly unmolested by fees.
- Fund choice: Enough to create a diversified portfolio [6].
The cheapest DIY pension I’ve found is the Best Invest Select SIPP [7] if your pension is worth less than £59,000 and the Interactive Investor SIPP [8] if it’s worth over £59,000.
The Best Invest SIPP offers:
- No set up fee.
- No dealing fee for Unit Trust / OEIC funds.
- A market-clobbering platform charge of 0.3% of your assets per year.
- No switching fee (an industry standard, but still good to know).
Note: I’m not factoring in any charges incurred here when you start to take your pension. The world could look very different on that day, so it would amount to speculation.
Mind your fees and Qs
The percentage fee platform charge is very important for an investor with a small amount of assets.
A 0.3% nibble of £10,000 will cost you £30 per year, in comparison to the £176 flat-rate charge you’d pay to Interactive Investor.
Percentage fees turn into a real burden as you amass wealth, however. Best Invest’s 0.3% would cost you £177 annually, if your SIPP was worth £59,000.
Meanwhile Interactive Investor would still be charging you a flat-rate of £176, no matter how much you’d stashed away with them.
So as you approach the £59,000 mark, consider switching to Interactive Investor if you can restrict your trading to twice a month and can take full advantage of II’s trading cost rebate feature [9].
Once your SIPP is up and running, you can then pick a low cost index fund portfolio from the SIPP’s fund list, diversified along the lines of the Monevator Pound Stretcher portfolio [3] or The Slow and Steady portfolio [10].
Use this recipe and the only extra fees gnawing at your future will be the relatively low Total Expense Ratios [11] (TERs) of your funds.
You’ll be hard pressed to run a tighter ship than this.
The bare minimum
The sticking point with the Best Invest SIPP is its minimum contributions:
- £2,880 lump sum to set up the SIPP (tax relief is added on top).
- £80 minimum per fund (tax relief is added on top).
On the face of things, those minimum contributions are pretty high hurdles. If they look too daunting, then a stakeholder pension [12] can be yours for no more than £20.
Bear in mind though that assuming you can find the required lump sum, you can thereafter top-up your funds in bite-size chunks. There’s no need to pay in £80 per fund every month. You could save a smaller amount, and buy a fund when you can afford it – perhaps feeding into one fund per quarter.
I’d start off with a low cost World or International index fund (Vanguard and Fidelity have very competitive offerings) and then diversify into a gilt index fund, adding further cheap trackers [13] (for example a FTSE All-Share fund) as you build up your assets.
Our brassic paradigm means you’ll have to shy away from the wallet-bashing fees associated with the other investments you might otherwise pop into your SIPP, such as ETFs, investment trusts, individual shares, gold bullion et al.
Ready, aim, retire!
So you have it. If you’re living on beans at the moment and you don’t want to spend your old age the same way, then choose the cheapest pension you can, get cracking, and let compound interest [14] put the wind in your saving sails.
Take it steady,
The Accumulator
Note: We updated this article with brand new facts and figures on cheap DIY pensions in September 2014, so reader comments on the article may refer to the old, outmoded copy of yesteryear. Get hip to the new words, Daddy-o!