Should I switch my work pension to a Sipp run by a financial adviser? STEVE WEBB

I currently have a company pension scheme which is operated by a large pension firm, with my funds all in a tracker.

A financial firm I work with has suggested it would be advantageous for me to move my pension funds into a Sipp with them.

Apart from the fact it’s actively managed and has greater diversification of holdings, I wanted to see if you were able to provide any impartial advice or perspective on the differences between the two options, and the pros and cons?

Steve Webb replies: There are two separate questions for you to consider here.

The first is whether you are better off saving via a workplace pension, or with a self-invested personal pension (Sipp) on a platform run by an advice firm.

The second is whether, in general, you are likely to do better with investments which ‘passively’ follow market movements, or ones which are ‘actively’ managed, reflecting the judgments of fund managers.

Workplace pension schemes versus Sipps

In terms of the choice between a workplace pension and a Sipp, it is highly unlikely that you would do better to opt out of your workplace pension entirely.

Your employer is required by law to pay in to your workplace pension and it is likely to be a good idea to make the most of any employer contribution.

A second advantage of a workplace pension is that it is likely to be relatively low cost.

Whilst cost is not the only consideration, you are likely to pay significantly lower charges overall with a workplace pension, particularly if you work for a big firm.

There is a charge cap of 0.75 per cent on the main funds used in workplace pensions, and the average cost actually paid is typically closer to around 0.4 per cent.

It is however possible that you are paying more than this if you have chosen to move your investments out of the ‘default’ fund choice.

When it comes to a Sipp, hosted by a financial advice firm, there are multiple layers of charges to think about.

First there are the charges on each underlying fund in your new portfolio. If these are ‘actively manged’ then you are likely to be paying more than in your workplace pension.

In addition, your employer will have negotiated a competitive charge on behalf of all their employees for the workplace pension, whereas as an individual ‘retail’ investor you don’t necessarily have the same buying power.

Second, there may be a charge simply for having assets on the platform as well as potential charges for transactions.

Third, you may also be paying advice charges. Financial advice can, of course, be good value, but you need to make sure you are clear what you would be paying and what service you would be getting for your money each year.

It is also worth checking if the adviser is ‘independent’, meaning the firm will look at the whole market when recommending financial products to clients, or ‘restricted’, meaning they would only recommend those from certain providers.

You will also want to consider the adviser’s contractual terms, including how long you might be committed to staying with it and paying its annual ongoing charges, and any exit charges or rules in case you wish to move your fund elsewhere in future.

Active versus passive funds

You have sent me details of your proposed investment portfolio, and I see it includes some low-cost tracker funds with charges as low as 0.12 per cent as well as some actively managed funds charging up to eight times as much.

The overall average charge comes out at 0.73 per cent, which is significantly more than most people are paying for a workplace pension.

A workplace pension is managed on your behalf and all of the costs of doing this are included in the simple annual management charge, whereas with a Sipp run by an adviser you are paying extra for this service.

On the other hand, the workplace pension is trying to cater for the needs of potentially millions of members whereas your adviser can tailor your investments for your particular needs and preferences. You may think it worth paying more for this.

Turning to the debate about active versus passive investing, the obvious attraction of a passive fund such as an index ‘tracker’ is that it is likely to be very cheap.

Managers of a tracker do not need to have particular insights about different asset classes or different markets, they simply have to make sure that the fund performance broadly matches the index which is being tracked.

In addition, transaction activity is likely to be much lower in a passive tracker fund than in an actively managed fund, again reducing the overall cost.

If you simply want to invest in the main UK stock market, or the US or global stock markets, then an ‘active’ manager is unlikely to add much value net of additional costs.

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