Regular readers of the Fool UK will know that we consider the Self Invested Personal Pension (SIPP) a great way of saving towards retirement and making the most of the returns from investing in shares. Indeed, I’ve previously written about how this kind of account might help you reach the magic million-pound mark quicker than the (similarly-loved) Stocks and Shares ISA.
That’s why, today, I’m taking a closer look at a big development: the arrival of Vanguard on the scene.
For those unfamiliar with the company, Vanguard is among the world’s biggest providers of passive funds — those that seek to track the market return rather than beat it. Right now, it has assets of $5.6trn (yes, trillion) under management.
Part of the reason Vanguard is so popular is the low fees it charges. To track the FTSE 100 index, for example, you’ll be charged an ongoing fee of 0.09%. Compare this with the typical charge levelled by professional money managers of between 1% and 2% on some active funds and it’s easy to see why inflows into the Pennsylvania-based firm have rocketed over the last decade or so. The less you shell out in fees, the more profit you retain, even if the aforementioned managers outperform (most don’t).
So is this SIPP any good?
The newly-launched SIPP is certainly cheap — Vanguard has said that it will charge an account fee of 0.15% to holders.
The fee will also be capped at a £375. So, even if someone already has an ISA and/or a general investment account with the company (both launched in 2017), they’ll never pay more than this amount in total if they also sign up for the SIPP. To invest, those holding the account will need to put up a minimum of £100 a month (before tax relief is calculated) or a lump sum of £500 or more.
While calculating pension costs can get a bit fiddly (depending on how much money you have, the investments you hold and how often you buy and sell), Vanguard’s offering does look cheaper compared to its rivals. Market leader Hargreaves Lansdown, for example, has an administration charge of 0.45%.
It will be fascinating to see whether this is a catalyst for other providers to lower their fees. If it does, investors only stand to benefit.
What’s the catch?
For me, a slight issue with Vanguard’s SIPP offering is that it requires the holder to invest in — and solely in — funds that it runs. Then again, I don’t see this as a problem for a lot of people, particularly those that aren’t really interested in following the progress of their investments (which, ironically, can often lead to the best returns) and aren’t looking to put their money in anything remotely ‘exotic’.
What’s more, Vanguard’s selection already runs to 77 funds including the one-stop-shop Target Retirement and Lifestrategy products — all of which give instant and sufficient diversification to the holder.
One other thing worth knowing is that the SIPP is currently only available to those in pre-retirement. In other words, anyone wanting to take money out of their account won’t be able to do so, at least until Vanguard makes this possible in the 2020/21 tax year.
Caveats aside, I suspect this new relatively low-cost account will prove very popular with those wishing to get their retirement savings in order.