These are confusing times for DIY drawdown investors. This is because the charges on your self-invested personal pensions (Sipps), in which your investments are held, are changing.
Sipp providers are being forced to adopt new 'clean' charging structures, which will see commission rebates from fund managers to platforms and Sipp providers banned. As a result, charges are changing dramatically and every investor should reassess their Sipp to make sure they are on the most cost-effective platform.
If you're a DIY Sipp investor you need to research the market to make sure you're getting the best deal - and that will depend on the size of your portfolio and the investments you're holding in it. But finding a like-for-like comparison can be tricky as some providers have been slow in announcing their new charging structures. Here we show you what you need to look out for and give a rundown of some of the main providers.
Trading charges
With people living longer and longer as life expectancies surge, you can expect to be in income drawdown for a good number of years - especially if you're retiring early. During this time you'll need to rebalance your portfolio - buying and selling holdings to make sure you're getting a healthy return that's going to supplement your income. That's why trading costs are the most important thing to take into account when choosing a Sipp for drawdown, according to Adrian Walker, retirement planning manger at Skandia.
If you've got a small portfolio (around £50,000) with a mix of funds and equities, Bestinvest and AJ Bell look the best value for money. Research from The Platforum shows you'd incur annual charges (assuming 10 trades per year) of £427 a year. The most expensive platforms for someone with a Sipp of this size are TD Direct and The Share Centre.
If you've got a bigger portfolio, Interactive Investor and The Share Centre look like the cheapest in terms of charges. Someone with a portfolio of £350,000 split 50/50 between funds and investment trusts (trading 10 times a year) would incur £1,714 and £1,720 a year, respectively. This is more than £700 a year cheaper than the most expensive platforms (Hargraves Lansdown and Bestinvest) for someone with a portfolio of this size.
Tip: It is worth noting that most platforms charge less for trading online - rather than over the phone.
Tip: If you're in income drawdown (and taking an income from it), you don't need to worry about reinvesting dividends on shares and investment trusts. This is because you can take the yield as part of your income. It also means you can choose income (listed as 'Inc') versions of Oeics and unit trusts - rather than the accumulation versions (listed as ‘acc’).
Hidden charges/exit fees
If you're an income drawdown investor, you should also look out for other 'hidden' charges that could bite a piece out of your pension pot further down the line. For example, there could be fees payable if you decide to switch to buying an annuity in the future, to switch provider, or to close the pension when you die.
Some Sipp providers work this out on a time/cost basis. AJ Bell (Sippdeal) charges a minimum of £250 + VAT. TD Direct also works out the cost on a time/cost basis and says the average cost is £350 + VAT - but the bigger and more complex your investments, the more this will cost. The cost of paying death benefits from a pension and closing a Hargreaves Lansdown Sipp account is fixed at £295 plus VAT. Fidelity has no extra charges for the payment of death benefits.
Tip: You need to complete a nomination of beneficiary form, saying to whom you wish the remainder of your drawdown pot (minus the 55 per cent tax charge) to be paid, so the trustees of the fund know who to pay it out to. Ask your provider about this if you haven't already.
Cash rates
Most income drawdown investors hold a proportion of their fund in cash - an amount equivalent to three years of income is normal, according to Phil Bray, marketing & relationship manager at Investment Sense.
But many platforms, including some of the most popular, pay little or no interest on cash. "They prefer to keep the interest for themselves to boost their profits," he says. Most providers pay from 0.00 per cent to 0.10 per cent interest, but Alliance Trust's policy is to pay no interest on cash deposits at all. On its charges sheet, Alliance Trust Savings says it "may itself earn and retain interest on amounts which are placed on deposit. The amount of such interest may vary from time to time."
So, if you are holding large amounts of cash in your Sipp, take care to factor in any interest, or perhaps more accurately, the loss of interest, into your charging calculations
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Comparing Sipps for drawdown
Source: The Platforum.
Notes: Both portfolio scenarios are for Sipps only, with assets held half in equities and half in funds. Both have 10 transactions a year: five for the funds and five for the equities.They include the underlying fund costs based on the following funds: Artemis Income, AXA Framlington UK Select Opportunities, First State Asia Pacific Leaders, M&G Optimal Income, BlackRock Gold and General, M&G Recovery.
Hargreaves Lansdown has used its purchasing power to secure discounted rates on a number of funds - the average being 0.11 per cent for funds within the Wealth150. For our comparison, we have not included these deals and have used the standard clean share classes. They will be releasing details of specific fund pricing on 1 March.
| Platform | Annual fees per £50,000 invested | Annual fees per £350,000 invested | Drawdown set up costs | Ongoing drawdown costs | Exit fees / death benefit payments |
| AJ Bell Youinvest | £427 | £2,695 | £150 + VAT | £100 a year Sipp fees, one off pension payments £25 +VAT | £250 + VAT. |
| Alliance Trust Savings | £513 | £2,422 | £200 + VAT (£250 + VAT for flexible drawdown) | £75 +VAT per year, GAD valuations are free, paper statements £5.00 | £150 + VAT transfer out/death benefits |
| Barclays Stockbrokers | £589 | £3,232 | £75 + VAT | Administration £100 + VAT per year (collected annually in advance), benefits review £75 + VAT | £75 + VAT, payment of death benefit cost calculated on a time/cost basis |
| Bestinvest | £427 | £3,405 | Free (£150 + VAT for flexible drawdown) | Each GAD valuation £100 every three years, one-off income payments £25 + VAT | Account closure £125 + VAT, death benefits payment charged on a time/cost basis, exit as stock £25 + VAT per stock. |
| Charles Stanley Direct | £427 | £2,928 | Free (£250 + VAT for flexible drawdown) | Ad Hoc Income Payments £25 + VAT. | Annuity Purchase if not through Charles Stanley £150 + VAT. |
| Fidelity | N/A | N/A | Free (from 9th Feb) | Free (from 9th Feb) | Free |
| Hargreaves Lansdown [3] | £487 | £3,451 | Free (£295 + VAT for flexible drawdown) | £75 + VAT per GAD calculation, alter payment amount/frequently £10 + VAT, one off payments £25 + VAT | Death benefit payment £295 + VAT. Transfer to another provider as cash will be £25, transfers of stock will be £25 (per line of stock), account closure £25 (no VAT on these charges) |
| Interactive Investor | £454 | £2,344 | Pension review £150 + VAT | Income withdrawal £125 + VAT pa up to the age of 75, £200 + VAT a year after the age of 75, GAD calculations £150 + VAT every three years. | £100 + VAT death benefits or transfer out. |
| TD Direct Investing | £596 | £3,240 | Free (flexible drawdown £75+ VAT) | £150 + VAT a year drawdown fees (£250 + VAT a year if aged 75 and over) | Death benefits payment calculated on a time/cost basis (£350 + VAT average). Annuity purchase £75 +VAT, closing Sipp through flexible drawdown or trivial commutation £75 + VAT. |
| The Share Centre | £517 | £2,518 | £225.00 + VAT(flexible drawdown £225 + VAT) | Drawdown review £165 + VAT, pension income payment fee £195 + VAT, transfer in £75.00 + VAT | Death benefits from £300, based on £150 per hour fee, annuity purchase £175 + VAT, transfer out £100 + VAT. |
