Stick with the default setting – it’s what we humans do, because we’re time-poor and often unconvinced that the change will be worth it.
It’s why, when it comes to the different pension pots we accrue over the course of our careers, many of us are inclined to leave them scattered about the place.
However, did you know that consolidating your pensions within a self-invested personal pension (SIPP) could conceivably earn you thousands of extra pounds, even tens of thousands of pounds?
It isn’t the only potential benefit. But it’s the most eye-catching once properly understood.
In a second blog, I’ll look at some of the other good reasons to bring together your defined contribution (DC) pensions, but this one is dedicated solely to the major cost savings you could make.
How much are you being charged?
The workplace pension landscape is a complex one due to the many different types of pensions – and all the more so since employers have been required to automatically enrol their employees. However, a 2020 government study1 of almost 30 million workplace DC pension pots2 gives us a fair idea of the annual fees charged.
The good news is that these charges have in general been coming down in recent years. In most cases, they are now below the 0.75% cap set by the government. Still, this excludes any additional ‘fund manager expense charges’ or transaction costs. Also, almost one in five qualifying schemes are still charging between 0.5% and 0.75% a year.
Compare that with Vanguard’s 0.15% flat annual fee, which covers any individual savings account (ISA) held with us as well as any SIPP, and the 0.2% ongoing costs that we charge on average.
At face value, these differences look like small change. But over time, they can add up through the power of compounding. Consider an annual fee saving of just 0.4% on a pension pot of £30,000. If invested and earning a hypothetical 5% annual return, that’s more than £1,500 after 10 years invested, almost £4,000 after 20 years, and very nearly £8,000 after 30 years.
Bigger pot, greater savings
Now imagine the savings if our starting assumptions are bigger. Imagine if the different pensions we are able to conjoin in a SIPP have a combined value of £200,000. At this point, using the same set of assumptions as above3, we would be saving roughly the equivalent of one year’s worth of state pension – or more than £10,000 – after just 10 years.
And the savings get better and better, the bigger the pot – especially when you consider the fact that Vanguard’s platform fees are capped at £375. So once your combined Vanguard SIPP and ISA savings reach £250,000, that’s it – all you are effectively paying for after that point are your individual fund fees and transaction costs.
Until now, my focus has been on the cost savings you can potentially make by transferring your old workplace pensions to a low-cost SIPP, and to do that I’ve relied on data collated by the government.
But these are not the only DC pension pots out there. If you’re self-employed, a high-net-worth-individual or a thrifty investor who habitually puts away more money for retirement through a personal pension alongside their workplace scheme, in order to earn more tax relief4, you may have retirement savings on rival investment platforms or managed by wealth management firms.
If so, the total fee differences compared with what you would pay on a Vanguard SIPP could be well north of one percentage point once fund fees and transaction costs are added to the annual platform fees.
For a taste of the potential savings you could be missing out on, consider that it would take less than 17 years to accumulate an extra £100,000 by saving 1% annually on a £400,000 pension pot, using the same market assumptions as above5.
In my next blog, I will look at five further benefits that can flow from consolidating your pensions. Indirectly, they too could potentially put even more retirement money in your pockets, as well as giving the extra control to live the retirement you want to live.
1 Pension charges survey 2020: charges in defined contribution pension schemes’, Department for Work & Pensions, 13 January 2021.
2 DC pensions are based on how much you pay in and invest and how well your investments fare. They are increasingly the norm among workplace pensions and include SIPPs. In contrast, ‘defined benefit’ company pensions are usually funded by your employer and based on your salary and how long you’ve worked for them.
3,5 0.4% difference in costs and 5% average annual return.
4 As a rule, we believe you should take full advantage of any employer matching available to you before making contributions to a private personal pension. Remember also that the tax-free allowance on all your contributions, across all your pensions, is subject to a maximum annual cap of £40,000.
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