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
However it seems Vanguard has been beavering away since then.
- 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.
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.