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How to find the cheapest 'low-cost' Sipp

Want to save for retirement? Fed up (or put off) by the high charges and poor performance of many of the traditional personal pensions out there?

Low-cost pension: Sipps are the future of pensions - find the cheapest deal

A Sipp may be right for you. Here, we guide you through the market so you can find the very best deal about.

Background: What is a Sipp?

Sipps – or Self-Invested Personal Pensions to give them their full name – are DIY pension schemes where investors can choose their own investments.

Originally created in the early Nineties to cater for extremely wealthy savers, a new no-frills version is revolutionising personal pensions.

Simple and inexpensive, the 'low-cost' Sipp has opened the market to middle-income investors looking to boost returns by going it alone.

- Why low-cost Sipps are the 'future' of pension saving

How does a Sipp work?

Low-cost Sipps work are almost identical to the fund supermarkets used by Isa investors. In fact, the only difference is a pension tax 'wrapper' that means you don't pay income tax on contributions. For higher rate taxpayers on a rate of 40% or even 50%, this is very beneficial.

As with all pensions, the money cannot be withdrawn until age 55.

Is a Sipp right for me?

If you already have a fairly substantial investment Isa saver the short answer is probably 'yes', and especially if you're a higher-rate taxpayer. It's a less clear-cut issue if you only pay basic-rate tax, as your money is tied up for so long. A company pension may hold greater benefits, such as contributions from your employer.

One thing to watch out for is that Sipps come in very different shapes and sizes - from low cost to hybrid to bespoke - and with confusing charging structures.

Low-cost Sipps will suit the vast majority of pension savers, although some may find a personal pension a simpler option*. You'll have access to thousands of funds at reduced charges. It's then just a case of picking the right ones.

The key question to ask yourself is this: Am I prepared to do the homework and regularly monitor my investments? Am I comfortable to live and die by my own investment decisions? If you can say yes to both, then you're doing the right thing.

Bespoke Sipps are for wealthy savers. They have higher charges because they allow a full range of HMRC-permissible investments, such as unlisted and commercial property. Hybrid Sipps fall somewhere in between. Read our story about spotting the differences between Sipps.

If want greater investment choice or you're unsure, we recommend you speak to a financial adviser. Find a well-qualified pensions adviser near you.

  Top tips to find the cheapest Sipp

If you're confident enough to go it alone - and you have the funds to play with - then follow our guide to low-end plans where the provider does not offer advice. These are the questions you need to ask...

1. How much are annual fees on the funds? These are the ongoing charges applied to funds that you put into your Sipp. It is the single most important thing to focus on: high annual charges create the worst drag on performance. Typically fund providers charge 1.5% a year on actively managed fund. But often half of that fee goes to the Sipp provider. Some keep the lot - such as Hargreaves Lansdown - some hand back some - such as Bestinvest - and others will hand back all of it to you - such as Alliance Trust Savings. That can be worth an extra 0.75% year, or a whopping £750 A YEAR on a £100,000 portfolio.

2. What is the set-up fee? It's typically anything from nothing to £500.

3. What is the Sipp annual management fee? This is a small percentage applied every year that will eat away at your returns. Avoid it if you have a large portfolio. More commonly, it is a flat fee. A fee-free plan is a good starting point by you might find it is cheaper in the long run to opt for a scheme that clearly levies a charge but hands back 'commission' to you that other Sipp providers choose to keep (see point 1).

Costly: The charges for buying and selling funds and shares vary greatly between Sipps

4. How much are initial charges on funds - Oeics and unit trusts? These upfront fees are 5% if invest via an IFA (to pay for the advice) - or if go direct to a fund manager (for no apparent reason). But a decent fund platform should give you back these fees. Check the discounts on the actual funds you're planning to buy by using providers' websites. Many of them won't always hand back the full initial charge.

5. How much are dealing charges on shares, ETFs and investment trusts? And does the provider charge you for holding these? Hargreaves Lansdown, for instance, will charge 0.5 per cent on those holdings. If you're not planning to hold any of these, you should think again. Research shows investment trusts are not only cheaper but offer better long-term average returns than Oeics and unit trusts [read more]

6. How much are the transfer fees? These are charges applied for moving money, funds or shares into a Sipp from another provider. Also, check if there any exit fees on moving to another pension provider. These can range into the hundreds of pounds with some providers.

7. What rate of interest will I get? Interest rates on cash left in a Sipp are pitiful varying from zero to 0.5%. If you expect to keep some of your pension in cash, check what the rate is. For example, Fidelity currently pays one basis point below the UK bank rate.

8. What are the other charges? Look out for the costs of buying an annuity, costs for paying out on death, etc. Remember that these one-off fees are less important than finding Sipps with cheap annual fees.

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Leading low-cost Sipp providers

The best rule of thumb is to start with Sipp providers who do not charge either a set-up or annual management fee. These include:

- Alliance Trust Select Sipp No minimum transfer and the minimum investment is £50. Transferring in is free but there is an annual administration charge of £125 and £12.50 to buy or sell shares OR funds.

Pros: It rebates ALL commission payments on funds, dramatically reducing your costs and making your end pension pot far bigger than it would otherwise be. Even with the unusual fund dealing costs, those with decent size fund portfolios - say, growing to £50,000-plus - would find this option far cheaper than most rivals.

Cons: Its website is clunky and lacks the portfolio analysis tools available elsewhere. It also has a slightly smaller fund range than the biggest players, like Hargreaves, although it is a new player and the range is constantly expanding.

- Hargreaves Lansdown Vantage Sipp Minimum transfer of £5,000 and a minimum investment of £50 a month or £1,000 lump sum. There is no annual fee.

Pros: It has efficient customer service and excellent online tools, especially portfolio analysis.

Cons: Annual charges are high as the company keeps all marketing commission payments from the funds (on Isas it hands some back to investors). That will have a significant impact on your pension pot over the long term versus the Alliance option above. Hargreaves also charges 0.5 per cent on any investment trusts and shares you hold, capped at £200 a year.

- Sippdeal.co.uk (AJ Bell) Free transfers in with no minimum investment. Online dealing starts at £4.95 if you make 20 trades a month or is otherwise £9.95. It also rebates some - but not all - annual commission charges, up to 0.5 per cent. This falls short of Alliance Trust but it is free to invest in funds.

Pros: It's great for frequent online share traders who hold a smaller proportion of their Sipp in funds.

Cons: It does not hand back the full commission on funds.

This is Money says:

Picking a winner is a hard call, because each providers listed above has benefits and drawbacks - each pension saver's needs will dictate the right choice for them. It's really important to do your own research and sums to see which fits the bill.

But as rule, the charges will be lowest - if you have a reasonable size Sipp - on a platform that rebates all commission.

If you're not bothered about the bells and whistles on a site like Hargreaves, Alliance Trust is easily the best option.

It rebates all initial charges on funds and ALL the marketing commission that funds pay to fund-selling platforms.

It makes its money by charging each time you invest - £12.50 per fund or stock or £1.50 a month for regular savers. But even that dealing fee is reduced if you hold the Alliance Trust investment trust.

Hargreaves Lansdown Vantage Sipp carries no set-up fee and no annual charge for providing the Sipp wrapper around mainstream funds. But it does keep all the annual commissions and levies an annual charge of 0.5% plus VAT on other investments, such as individual shares and gilts, capped at £200 plus VAT a year.

Online share dealing fees range from £5.95 - if you've made 20 trades in the previous month - to £11.95.

Sippdeal from AJBell is the winner on pure share-trading front, charging £4.95 to £9.95 per deal. This includes ETFs and investment trusts, which work like shares.

Newly-launched Commfreefunds.com is similar to Alliance Trust in rebating all commission. For now it only offers Isas but will aims to offer a Sipp in 2012 in collaboration with Cofunds.

• Best for... cash deposits

Fair Investment Company offers market-leading rates on cash deposits. This will help those nearer retirement downgrading their risk. [Read more]

 

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