Latest news with #workplacepension
Daily Mail
26-05-2025
- Business
- Daily Mail
Should I switch my work pension to a Sipp run by a financial adviser? STEVE WEBB replies
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. Information about the biggest companies is readily available and so the potential for an expert fund manager to outperform the market on a consistent basis is limited. But there is research evidence that suggests that active managers have the potential to add more value in more specialist markets. One downside of simply investing passively in 'tracker' funds is that when you look at the companies which make up the index you may find them heavily concentrated in particular sectors. For example, the US stock market is heavily dominated by the so-called 'Magnificent Seven' technology stocks. As it happens, these stocks have done very well in recent years, but it is not inevitable that this will always be the case. By relying heavily on index trackers, your investments are unlikely to be well diversified and are likely to suffer greater volatility than a more broadly-based portfolio. One way to overcome this is to include trackers as part of a wider and more diverse set of investments, and I see that this is the approach taken in your proposed portfolio. Alongside low cost trackers, your investments would be globally diversified and includes investments in 'emerging markets', as well as specific funds for China and Japan. If your fund managers have specialist expertise in these areas then it's possible that they can add value and justify the extra cost. You should be able to look at fact sheets for different funds which will tell you how they have performed compared with relevant benchmarks. But you should be aware that just because a fund has outperformed an index in the past it doesn't automatically follow that it will always do so. Ultimately, this is a very individual decision. You clearly should think very carefully about opting out of your current workplace pension with its associated employer contribution and low cost investments. But if you think that your goals would be better met by something more tailored, albeit more expensive, then you could consider putting additional contributions into a Sipp and also potentially consolidate other pensions from other jobs into the Sipp. Your adviser will be able to recommend whether this is the right strategy for you. Ask Steve Webb a pension question Former pensions minister Steve Webb is This Is Money's agony uncle. He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement. Steve left the Department for Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock. If you would like to ask Steve a question about pensions, please email him at pensionquestions@ Steve will do his best to reply to your message in a forthcoming column, but he won't be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons. Please include a daytime contact number with your message - this will be kept confidential and not used for marketing purposes. If Steve is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public. It can be found here and its number is 0800 011 3797.
Telegraph
25-05-2025
- Business
- Telegraph
‘I'm 30 and can't rely on the state pension. How will I ever retire?'
On paper, Tom Atterton is doing all the right things for a comfortable retirement. The 30-year-old has a blossoming career in financial services, owns his own home and has moved his pension into high-growth funds with a long-term horizon. But despite this, Mr Atterton worries he could be working into his 70s. That's partly because he opted out of his workplace pension at the start of his career, preferring to boost his take-home pay instead. 'I was in my early 20s, I wasn't even remotely thinking about retirement. 'And I suppose there was a lot of doom and gloom at that point about how millennials will never retire anyway, there'll be no state pension left. So part of me just thought, 'Oh well, I'll enjoy my life now then'.' With those years behind him, Mr Atterton hopes to retire before he turns 68, but wonders if this is now out of reach. So far, he has just £12,500 in an old pension and £2,500 in his current scheme after three years' worth of contributions. According to the Pensions and Lifetime Savings Association (PLSA), a single person in the UK requires an income of £31,300 for a 'moderate' retirement that includes one holiday a year and several meals out a month. Mr Atterton, who is based in Aberdeen, says: 'It's a worry. Reliance on the full state pension on its own without any workplace pension isn't going to get you anywhere.' Many young people face financial instability later in life due to high living costs and inadequate savings. Defined benefit schemes – which pay a guaranteed income in retirement – have virtually disappeared from the private sector. Meanwhile, the cost of the 'triple lock' – a government pledge to increase the state pension each year by at least 2.5pc – is expected to hit £20bn a year by 2045, raising questions over whether it will still exist by the time millennials come to retire. Mr Atterton earns £38,000, and contributes 7pc into his workplace while his employer pays 5pc. He wonders if he should be making more sacrifices now in order to retire before age 68. 'There will be people who pay nothing into their pension and live a fantastic life now, and then there will be people who pay in everything they can and eat beans every day of the week. I don't want to be in either camp. I want to do a bit of both – not have the most boring, frugal life possible.' Mr Atterton has already taken some steps to grow his pension. He's switched out of the default option for both his workplace pensions and into the more growth-oriented Legal & General Global Equity Index Fund and Royal London Global Equity Select Fund. 'I'd love to do more sustainable investing. But then I look at the sheets compared to what I've got and obviously they're more expensive and they really don't seem to do as well. So if I were to move those into sustainable funds, while it would be good from a societal point of view, would it be to the detriment of my retirement?' He hopes that when he comes to remortgage, this may free up some cash, making it easier to increase his pension contributions. He currently pays about £480 each month on his mortgage, and his 5.3pc fixed-rate deal is due to expire in 2027. 'I know 5.3pc is quite high, but there wasn't much choice. I suppose the positive is that hopefully by 2027 the renewal rate is lower. If my mortgage rate goes down, could I add the difference to my workplace pension? Should I overpay the mortgage or save into my pension – which is the best?' Tyron Potts, associate at consultancy Barnett Waddingham If Mr Atterton keeps contributing 12pc of his salary into a pension – including his employer's share – steadily for the next 38 years, and his salary keeps pace with inflation, his pension pot could grow to around £760,000 by the time he reaches 68. Taking 25pc of that as a tax-free lump sum would leave about £569,000 to generate an annual retirement income of roughly £38,000 in future terms, which would feel equivalent to roughly £11,000 a year in today's money, adjusted for inflation. If he skips the lump sum and leaves the full pot intact, that income could be closer to £15,000 in today's terms. Right now, £11,000 a year in retirement would fall below the minimum standard of living, and even £15,000 would only just nudge above it. To enjoy a more comfortable, moderate lifestyle – around £31,000 a year in today's money – he'd need about £1.6m without a lump sum, or around £2.1m with one. These figures are based on UK-wide estimates and don't account for regional cost of living variations. In Scotland, it may be fair to knock 5pc to 10pc off those targets. To build a pot of that size, he'd need to increase his contributions quite a bit – to around 27pc of his salary (with 22pc from him and 5pc from his employer) to reach £1.6m, or up to 36pc in total (31pc from him and 5pc from his employer) to get to £2.1m. When saving for retirement – especially in your 20s and 30s – every penny counts. Monthly increases invested now will be supercharged by the power of compound interest. In practice, contributing an extra one percentage point of his salary for the rest of his working life (so around £100 per month extra to start with) would result in a fund at 68 of £930,000 – which would provide an annual income in today's terms of £18,000, or £14,000 per annum if he takes the 25pc lump sum at age 68. An extra £200 a month (rising as his salary rises) would result in an estimated fund at age 68 of £1.1m. This could give £21,000 a year today – or £16,000 per annum with a 25pc lump sum. It's a strong goal if affordable, but should be balanced with living well now. Retirement at 68 might not be considered worth it if life until then is a struggle. Deborah Riding, financial adviser at Stan Sherlock Associates, part of The Openwork Partnership Unless funds explicitly state that one of their objectives is not to invest or have any connection to investment in fossil fuels, there is no guarantee they won't be exposed to fossil fuels now or in the future. In the case of Mr Atterton's funds, the fact sheets state no specific restrictions regarding fossil fuels, so exposure is feasible. If this doesn't sit right with Mr Atterton, then he could consider specialised ESG (environmental, social, and governance) funds for his pension. This is no longer such a niche strategy. These funds have set guidelines of what they will exclude from their investment strategies such as tobacco, alcohol, armaments, and fossil fuels. ESG and ethical active funds range from ongoing charges of anywhere from 0.55pc to 1.02pc, and ESG and ethical passive funds range from 0.12pc to 0.36pc. The risk category of the investment will also have an impact on the performance. Overpaying on a mortgage will ultimately reduce the amount of interest he pays. However, he may not be better off if his savings and or investments receive a higher rate of return than the interest he pays on his mortgage. Overpayment will reduce the capital he owes and increase his equity. It could also reduce his loan-to-value, which may make cheaper mortgage deals available to him. Any money put into pensions can't be accessed until pension age, currently 55 moving to age 57 from April 6 2028. This must be money he doesn't need in the short term. Certainly, if his mortgage is paid off before retirement, then it will make it easier for him to retire as he will not need as much income to cover any mortgage payments. If the mortgage is paid off earlier, it may allow him to retire earlier. How quickly he could pay off the mortgage depends on what his current term is now, and the maximum amount his mortgage provider will allow him to overpay without an early repayment charge. Some allow an overpayment of 10pc or 20pc of the original capital, and some allow an overpayment of the capital balance each year to either 10pc or 20pc. Most lenders allow 10pc, but there are those like NatWest that allow 20pc on some of their products. It will also depend on what the future interest rates will be on his mortgage for the remainder of the term after his fixed rate deal ends, and how much he could afford to overpay. Paying into a pension will provide tax relief at his highest marginal rate. So, even as a basic rate taxpayer, he could receive a further 20pc on top of his own funds. Paying into a pension and building up adequate funds could mean he can afford to retire before state pension age.
