If you want something done properly, it often pays to do it yourself. So it must be good news that as of 6 April, when George Osborne’s pension reforms take effect, it will be easier than ever to run your own pension fund, because you won’t be forced to retire as an investor when you cease to work for a living. Instead, everyone — not just the rich — will be allowed to retain ownership of their life savings and try to live off them by means of what is known in the jargon as ‘income drawdown’.
But is a DIY pension right for you? Institutional funds are buying government bonds with both hands — despite prices hitting record highs and yields falling to historic lows. This could be a recipe for future disappointment for individual savers, depending on what happens next.
Here and now, the important thing is that self-invested personal pensions (Sipps) can enable everyone — including members of occupational schemes (a pension linked to your job) — to choose our own stores of value to fund retirement, including shares, bonds, cash, property and gold.
However, more choices — created by the imminent abolition of any compulsion to buy an annuity, or guaranteed income for life — also means more ways to make mistakes. Here are six questions to consider before deciding whether to risk your life savings in George Osborne’s retirement revolution.
What have you got?
If you are a member of company pension scheme — or have the right to join one — where your employer makes contributions to the fund, failing to take this benefit amounts to volunteering for a pay cut. This might sound obvious but millions do just that.
Similarly, if your occupational scheme is set up as a defined-benefit or final-salary fund — check the annual statement — then you should hang on to it as a low-risk way to fund retirement. You won’t need to worry about investment returns or annuity yields. The only exception would be where you fear your employer might go bust or default on its pension promises.
Most private-sector schemes — including all personal plans — switched to a defined contribution or money purchase basis years ago. However, it’s worth noting that everyone — including members of both types of occupational pension — has been allowed to also contribute to Sipps for nearly a decade. So sticking with the firm or going DIY is not an either/or choice; you can do both.
How can you tell whether returns are adequate?
If you read the annual statement all pension funds must issue — and that single act will make you better informed than many members of a newspaper scheme where I used to be a trustee — you will see total returns, usually shown on a calendar year basis. You can compare these with the relevant stock market index or fund performance figures available free online from independent statisticians including Bloomberg, Morningstar and Trustnet. Try not to focus on just one year’s returns and consider at least five years; the longer the better. Also, make sure you compare like with like. Most pensions are managed funds — or a mixture of shares, bonds and property — which is likely to produce lower volatility and returns than pure equity strategies based on the FTSE All-Share or other global indices. Finally, remember that your employer may well pay the company scheme’s costs, but is unlikely to do so for a Sipp.
What will it cost to run your own retirement fund?
There is no initial charge to set up a simple Sipp with many providers, including Alliance Trust, Fidelity, Hargreaves Lansdown, James Hay and Zurich. After that, annual charges might be determined in cash terms — up to £275 at Alliance or £200 for Prudential’s fund Sipp — or a percentage of the assets under management — such as up to 0.35 per cent at Fidelity or 0.45 per cent at Hargreaves.
However, these figures give only an outline of the total cost of running your own retirement fund. This will be determined by which assets you hold and how often you buy or sell. For example, Hargreaves Lansdown charges frequent traders as little as £5.95 to deal online in equities — including overseas shares. It also places a cap of £200 a year on annual fees for Sipps holding shares — including investment trusts — while there is no maximum limit on annual charges for unit trusts or open-ended investment companies. That makes shares much cheaper to hold than funds for bigger pensions.
You can see more details about a comprehensive variety of Sipps in Money Management’s special survey of April 2014, or go online to InvestmentSense.
How much do you need to get started with a DIY Sipp?
Many providers set low or no minimum initial investment to start a simple Sipp, holding mainstream assets — such as shares, bonds, cash or funds — without financial advice. This is may be the best option for most people who feel able to run their own retirement fund.
Alliance Trust — where I used to be a client before Scottish nationalism forced me south of the border — sets the bar at £50. Aviva — another provider I left, due to baffling paperwork — and Fidelity require £1,000. Hargreaves Lansdown — where I am currently a happy client — has no initial investment minimum.
If you want to hold more exotic assets — such as hedge funds, overseas currencies, agricultural land and gold — expect higher minimum investment limits, such as the £50,000 required by Barnett Waddingham.
Where can you get help?
You don’t need to go completely DIY when deciding what to buy or sell in your Sipp. In addition to many of the companies named above, wealth managers including Brewin Dolphin, Charles Stanley and Killik offer various degrees of advice and managed Sipps. As you would expect, the latter option costs more. For example, Charles Stanley’s annual management charge is £250 for a basic administered Sipp or £550 for a wider range of assets — including property — and fees range between 0.5 per cent and 1.25 per cent.
What is your pain threshold?
It is important to be aware that DIY pensions or Sipps will not suit everyone. When share prices fall and your pension shrinks you will not be able to blame some City suit: the idiot responsible will be staring back at you in the mirror every morning.
While people still at work can take the long view of such setbacks, it will be more difficult for pensioners who are investing irreplaceable capital. That is why many people entering retirement should continue to buy annuities.
But the fundamental appeal of Osborne’s revolutionary idea — or ‘pensions for the people’ — is that it gives us freedom to choose how we manage and spend our life savings. I enjoy several hours a week doing so. That’s less than many people devote to following a football team and a lot more rewarding.
Ian Cowie is a columnist for the Sunday Times Money section.