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Vanguard readying its Personal Pension SIPP

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Given how often we’ve been labelled a front for Vanguard – in reality it’s never paid us a penny to directly1 , more’s the pity – I was reluctant to post a lightweight update on its Vanguard Personal Pension service.

But so many of you alerted me to the latest smoke signals, how could I not?

It’s clear that a pension with the low-cost juggernaut is something many Monevator readers are waiting for.

“Whadayoogonnadoaboutit?” I shrug, like a New York mobster in a mid-70s movie.

The missing link

A pension product was conspicuously absent at the launch of Vanguard’s Personal Investor service in the UK last year.

However it seems Vanguard has been beavering away since then.

The latest:

  • Vanguard has obtained necessary permissions from its regulator, the FCA.
  • The Vanguard Personal Pension is registered with HMRC.
  • The product will be structured as a low-cost SIPP2.
  • There’s still no launch date. We can expect an announcement in 2019.
  • The service will handle lump sum additions, regular contributions, and pension transfers.
  • De-accumulators will have the option of flexi-access drawdown from launch.
  • All Vanguard UK’s active and passive funds and ETFs will be available. (I’d expect people to be nudged towards its Target Retirement Funds.)
  • Vanguard says its pension will be low-cost and easy to use.
  • A dedicated pensions team has been recruited.

Pension perils

Vanguard admits it has taken longer than it hoped to get its pension up-and-running, though it hasn’t explained why.

I’m no expert on launching financial products. I’d guess though it comes down to the regulatory environment and a fear of mis-selling.

[Update: It may be due to software development delays. See comments.]

Because Vanguard will only be offering its own funds through its platform, some critics might argue that savers aren’t being given sufficient choice.

I don’t agree with that – at least not if they’re investing in broad-based tracker funds – but I do have sympathy with the view that putting all your eggs in one basket is sub-optimal in terms of total risk management.

And clearly that’s what will happen with a pension provider that only offers its own funds (a situation that won’t be unique to Vanguard, anyway).

The chances of Vanguard getting into trouble to the extent that your pension is threatened (remember, trouble might include fraud or technical disasters) seems to me infinitesimal.

But the impact on an individual from such a tiny probability event could be huge.

For me, that equation always suggests diversifying between at least two providers.

Of course it’s not a fatal issue. You’re allowed to have more than one pension provider, so such diversification is easily achieved. And as I say this risk is certainly not unique to Vanguard.

Even a major ‘open’ pension platform like Hargreaves Lansdown’s could equally (that is very, very unlikely) suffer some sort of permanent compromise. Brokers have failed. And in the opaque world of pensions there are already plenty of people banking their hassle-free retirement on the health of one company – not least with final salary pensions.

There are of course safeguards against pension failure, too. My point is after a lifetime of saving and with no time to make good any setbacks, you can’t afford to take chances. I’d therefore reduce the potential for catastrophic risks where possible.

A cheap platform is only half the battle

For a clue to the sort of thinking that Vanguard may have been grappling with, see this article from The Telegraph.

A 60-year old with a £420,000 pension pot says he has been advised to split it between two Vanguard funds – a Vanguard LifeStrategy 80 fund and a Lifestrategy 40 fund.

For this advice he’s charged £4,500 – to the apparent consternation of the experts the newspaper contacted.

To summarize, the experts want the money spread across 20-30 funds, including active funds and absolute return funds and “maybe gold”.

They say they’d charge much less than £4,500 for the upfront advice – but they’d charge 0.4% to 0.75% for ongoing advice.

True, £4,500 seems a lot to say “plonk it all in a couple of tracker funds”.3

We’ve often said much the same, for free!

But the average person hasn’t got the inclination to read Monevator for a year to learn why such apparently simple advice is probably the best way forward.

And for that reason, I’m not so sure that paying an extra £2,500 upfront to get the money into these super low-cost Vanguard funds is such a terrible deal.

I’m reminded of an old joke about a plumber who bangs a boiler once with a hammer to fix it and then writes an invoice for £250. When confronted that this was poor value for money, the plumber replies that the charge is for knowing where to hit.

Indeed I’d be prepared to bet, Warren Buffett-style, that a portfolio of the two LifeStrategy funds would beat most handpicked hodgepodges of expensive active funds that amounted to a similar risk profile – not least thanks to lower costs.

But sadly, the IFA who recommended the LifeStrategy funds seems to snatch defeat from the jaws of victory – at least as best I can tell from the article.

He or she will charge an ongoing 1% a year, the article implies, for presumably telling the client not to touch anything. (The LifeStrategy funds automatically re-balance).

If so that’s a travesty, which will undo all the good work of the initial selection!

Anyway, this is the quagmire that Vanguard is tiptoeing towards.

I have no doubt the firm will produce a simple and low-cost solution. But tools are only part of the picture. Education is all-important – and one of the hardest lessons for investors is there is no perfect strategy. Everything comes with compromises.

We’ll keep doing our bit, but I suspect it will be many years before self-directed pension provision is a solved problem in the UK.

  • Have a play with Vanguard’s simple Pension Calculator to see if you’re saving enough.
  1. It may have bought Google display ads at some point, not sure. []
  2. Self-invested personal pension []
  3. The LifeStrategy funds are actually funds of funds, albeit all Vanguard funds. []

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{ 68 comments… add one }
  • 51 Factor December 21, 2018, 6:03 pm

    Seasons greetings to you all.

    In the same way that annuities have a “bad name”, so seemingly does equity release, whereas ER, used prudently, is a useful weapon.

    For example, having organised mine via a reputable household name and their intermediary, and gone through the very thorough fact finding and explicit caveats procedures, I borrowed £20K as a lifetime mortgage, acknowledging that this debt will increase over time with the applicable interest charges. As I told them it would when I applied to them for the loan, the money is now sitting in a an interest earning savings account as my emergency cash reserve, to be drawn from only if I am in absolutely dire straits and have an urgent need for liquidity, and Mr Market happens to be feeling particularly grumpy; a savings account which I shall top up from income to counter both the impoverished interest it earns and inflation.

    I think of the interest charges as being like my annual AA membership fee, I’m happy to pay them for the peace of mind they purchase but hopeful never to have to “call for help on a cold winter’s night”.

  • 52 Hariseldon December 22, 2018, 12:59 am

    Advantage of a SIPP you get tax relief on the money going into the SIPP providing an uplift.
    Disadvantage you can’t take it out until you are 55 and when you do so, 25% can be withdrawn free of tax , after that you will be taxed in withdrawals. The tax rules might change in the future….( that applies to an ISA too of course)

    An ISA provides tax free growth of the funds as in a SIPP but no restrictions on withdrawals and they are tax free.

    Lots of wrinkles of course and lots of great articles explaining all this blearily on Monevator.

    Personally I’d do both…

  • 53 Hariseldon December 22, 2018, 1:15 am

    The tricky part of FAD is that most people have too little money…

    They have have no capacity to bear risk and an annuity can make sense if it provides certainty and peace of mind.

    As mentioned if you only have £200k and take an equity route with nothing but a state pension, it could end badly but if you start with £2,000,000 your probably going to do ok whatever happens.

  • 54 John B December 22, 2018, 10:39 am

    Its a matter of risk profile and timing. Anyone who’d taken out an annuity 5 years ago just after the rates had plummeted would have done very badly compared with someone who’d stayed in the market, and the reverse could be true for 6 months ago. But that’s combination of risk premium of equity and safety costs of annuities. Its just the downside of an annuity, together with an IFAs fees, could knock a 1/3 off your returns, while the upside is much less.

    With all deaccumulation strategies, starting with just enough is difficult. If you start with 10% more, from that mythical “One More Year”, you can be less cautious, and your chances of failure are less, and your changes of excesses much greater. The problem for FIRE is if it become One More Decade and you merely retire with the rest.

  • 55 SemiPassive December 22, 2018, 4:30 pm

    Someone beat me to the reason Vanguard is taking so long. They’re using FNZ, so don’t hold your breath. Maybe by 2020.
    The complexity of platform software (and to be fair to FNZ it is more complex than many people realise) is one major barrier to entry. The investment required is significant, and only the big players will be charging enough in fees to ever cover the implementation costs, let alone the ongoing costs on top.

    But at least Vanguard doesn’t have to deal with IFA networks for their direct offerings.
    The flip side is the software has to be bullet proof and user friendly for Joe Public to use it with confidence.

  • 56 dearieme December 23, 2018, 4:08 am

    I’ve just found this.

    “Finally, this paper is also unusual in calling into question the fitness of the performance metric favored by Ibbotson and Siegel, and many others: total return, especially when computed over periods of a century or more. Total return measured on the century scale presumes an investor who never needs to spend the dividends or interest received. No real investor, individual or institution, has that luxury. And there is one class of individual investor, now of growing importance within the financial planning literature as the Baby Boom generation ages, for whom the total return metric is particularly malaprop: retirees. Once portfolio accumulation ceases with retirement, portfolio income must be spent to live. Under those circumstances real price return, over short periods lasting two or three decades, becomes an important metric. By that measure, an investment in stocks has been dicey indeed.”

  • 57 John B December 23, 2018, 10:00 am

    I don’t understand that criticism of total return, as its alternative, the raw index, is so much worse, but in more common use. It answers the question “If I invested X then, and didn’t spend any of it, how much would I have now”. Obviously, if I did spend some of my investment, the answer would be different, and very personal.

  • 58 dearieme December 23, 2018, 2:15 pm
  • 59 John B December 23, 2018, 2:40 pm

    I tried reading the article, but having all the graphics at the end made it hard work, and without a definition of what “price return” was, I really wasn’t much wiser.

  • 60 dearieme December 23, 2018, 10:11 pm

    @John B, I found that the answer is to open the paper in two widows so that you can have the figures in the left window while you read the text in the right.

    “Price return” means the share price return, with or without inflation-correction, depending on what he’s discussing. So he ignores dividends, taxes, fees, … His point is that this “price return” is probably more relevant to the retiree than the total return since he’s likely to draw and spend his dividends.

  • 61 John B December 23, 2018, 11:06 pm

    I think I will ignore the article, as dividends do most of the heavy lifting in building a portfolio, and allow its value to be maintained in the early stages of drawdown. I don’t think a sensible conversation can be had ignoring 3% annual returns.

  • 62 SBS December 25, 2018, 12:00 am

    How I Learned to Stop Worrying and Love Annuities.
    My opinion has been moving it this direction. Good comments from Mark and others in this thread. It may be a difficult one to convince most people on, though. (But passive investing is pretty unintuitive, too!)

  • 63 Tony January 3, 2019, 4:12 pm

    On my procrastination to do list is switching my DC investments held with a well known pension provider direct to a SIPP mainly to cut the overall charges but also to have a direct market access and choice of funds. I’ve got Snowman’s comparison spreadsheet and that works well for me for ISAs and dealing accounts. But pensions has that added layer of charges at the end. Currently for me all dealing is free as are future withdrawals. I pay an advertised total 0.5% AMC. But assume I can beat that AMC with a SIPP (including any fund charges), isn’t it the case most platforms have additional fees for future withdrawals/drawdown. Any general pointers how to truly compare overall SIPP costs? Or do some people build up their pension investments with one provider and then for those not wanting to go down the annuity route, then switch it to another platform once they wish to start withdrawing, if the costs make that sensible? In other words, do people keep costs down with provider 1 then switch to whoever’s cheapest at the drawdown stage? If you get my gist.

  • 64 Peter B February 2, 2019, 1:12 pm

    I’m also waiting on the Vanguard SIPP offering with a little impatience, eager to transfer from a more expensive route I was obliged to make to beat a deadline for income earned in one year that I did not need to spend.

    btw, rather than the old plumber joke I prefer the old TV repair man joke – not that we have them anymore. “Why is the TV repair man able to charge so much?” It is for all the knobs he does not twiddle! I suppose the same could now be said about laptop repair, with suitable non-gender reference.

    But to get back to topic, any news/update of the launch date?

  • 65 Pinch February 3, 2019, 8:15 pm

    @Peter B #64
    No, no update yet – the accounts page still says:
    “Sign up to be the first to hear when we add this new account in 2019.” So I suggest you do just that.

    Go to https://www.vanguardinvestor.co.uk/investing-explained/investment-account-types

    Enter your name and email address on the website above, around halfway down, and they will email you when there are changes/updates.

  • 66 Dave Rees February 14, 2019, 8:30 pm

    My wife and I have yet to start SIPPs , but are keen to get things moving before the end of this tax year. I was hanging out for Vangaurd, but as this isn’t likely to happen any time soon, I was planning on kicking off with Interactive Investor (as a platform to access the Vanguard LS Funds) and maybe swapping over to Vanguard if it’s more beneficial to do so later on. Is this a sensible plan? Also, I’m struggling to work out how much we can lob in as a lump sum, taking into account the 3 year “carry over” allowance. Is this something it would be worth paying an IFA to work out for me?

  • 67 Vanguardfan February 14, 2019, 10:18 pm

    A tax accountant could advise about carry forward, rather than an IFA.

  • 68 Pinch February 15, 2019, 1:29 pm

    @Dave Rees #66
    You can work this out yourself if you want – both HMRC and the Pension Advisory Service seem to have good guidance on their websites.

    You will have to use up the allowance for the current tax year before you can use any leftover allowance from previous years. Due to this I can only say “seem” as I have not used up my current allowance and therefore not used either notes to determine any carry over allowances I may have left.



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