In the third leg of her pension odyssey, Heather Connon embarks on the process of setting up a Sipp for her various retirement funds.
After more than 30 years of working as a financial journalist, I have decided to cut back on work and start drawing down my pension.
Regular readers will know that I have decided to keep a diary of my progress in amalgamating my three pension pots - two from previous employers and one contracted-out personal pension - into one and accessing the benefits.
In previous articles I have covered my decision to opt for drawdown (which involves taking regular payments from the investments in my pension) rather than buy an annuity to provide a guaranteed regular income and my meetings with financial advisers to see whether I needed their advice (February).
The high cost of advisory services convinced me that I should look at setting up a drawdown vehicle myself. A 3 per cent fee is typical (albeit there is some flexibility), even before the costs of actually setting up an investment portfolio are factored in.
SETTING UP A SIPP
In essence, I need to set up a self-invested personal pension (Sipp), transfer the funds from my three schemes into it and decide how to take my benefits. Plenty of companies offer Sipps. However, while their services seem similar, the way these are charged for varies from firm to firm.
Moreover, working these out requires the reading of a lot of small print, and terms and conditions, as well as assessing how actively I am likely to trade, what I will invest in and how much I will have invested.
Comparisons are not straightforward: charges are levied in different ways, and Sipp company websites are not as clear as they could be.
I had to confirm my understanding of Fidelity's fees with its help desk, while Alliance Trust had different information on different parts of its website; unforgivably, even its official charges brochure did not have accurate up-to-date information.
I could have asked press offices to get all this information for me, but other self-directed investors would not have that option, so I did not take that route.
I decided to include three companies in my comparison that I already use for investment services. Standard Life has one of my three pension pots, Alliance Trust has my Isa savings and Fidelity has my children's savings.
I also decided to include Hargreaves Lansdown, as I consulted one of its financial advisers, and he came closest to offering what I wanted. A trawl of the best-buy tables suggested that AJ Bell and Interactive Investor were also worth looking at.
I abandoned Standard Life as an option after spending some time clicking around its website and failing to find anything appropriate for my needs.
Its Sipp information only covered paying into the fund and its DIY retirement pension appeared only to have open-ended funds, while I want to be able to choose across the range of investment trusts, exchange traded funds and possibly even direct shares.
WORK OUT THE CHARGES
Transferring money into a Sipp is free with all these providers. Other costs fall into three main types: an annual administration charge, fees for buying and selling investments, and fees for taking money out of a pension.
There are three key variables to consider that have a bearing on administration fees: whether they are fixed or based on a percentage of the fund's value, the size of the fund and what is held in the fund.
Alliance Trust and Interactive Investor charge fixed fees, while AJ Bell, Fidelity and Hargreaves Lansdown charge a percentage fee.
These three have a sliding scale, with lower fees for larger funds, but even so, the size of my fund - roughly £550,000 - means a percentage fee could work out more expensive.
Fidelity's 0.2 per cent on pots of more than £250,000, for example, would work out at £1,100 a year, assuming I did not take out a tax-free lump sum.
That compares with £342 a year at Alliance Trust or £300 a year at Interactive Investor. Alliance's annual fee includes four free trades a year. Interactive Investor's fee includes two.
LOOK OUT FOR CHARGE CAPS AND OTHER COMPLICATIONS
However, the comparisons are not quite that straightforward, as the companies charging percentage fees cap them.
Fidelity caps charges for any portion of the Sipp held in shares (as well as investment trusts or exchange traded funds) at a maximum of £45 a year, AJ Bell caps at £100 a year and Hargreaves at £200 a year.
I am a long-term fan of investment trusts, and I intend to use them for the bulk of my pension, so the fixed fees, rather than the percentage charges, are more appropriate for me.
Some companies charge for taking benefits, particularly if I opt for what is called an uncrystallised funds pension lump sum.
If you go for one of these, instead of taking the 25 per cent tax-free lump sum up front, you take the 25 per cent tax relief on each withdrawal from the fund and pay tax only on the 75 per cent balance.
Fidelity, Alliance Trust and Hargreaves Lansdown don't charge for these, Interactive Investor charges £204 a year for taking regular payments or £48 for making occasional one-off withdrawals, while AJ Bell charges £100 a year for taking benefits, whether conventional or uncrystallised.
The next consideration is dealing fees. Again, charges differ depending on whether I am buying open-ended funds or investment trusts.
Fidelity and Hargreaves Lansdown don't charge for funds, and they may be able to negotiate discounts on managers' own initial charges; AJ Bell charges £1.50; Interactive Investor charges £10; while Alliance Trust's basic charge is £9.99.
Alliance Trust offers loyalty discounts, depending on the length of time you have been a customer. I qualify for the maximum discount, so I would pay £7.49 per deal.
For shares, including investment trusts, Interactive Investor and Alliance Trust charge the same fees as for open-ended products, Fidelity charges 0.1 per cent of the transaction value, AJ Bell charges £9.9 and Hargreaves £11.95.
Interactive Investor, Hargreaves and AJ Bell offer discounts to regular traders. These usually apply if a trader has made 10 trades in the previous month, but as I don't intend to trade regularly, I am not taking these into account.
PREPARE WELL TO TAKE A DIFFICULT DECISION
It is hard to translate these various fees into expected annual costs, so choosing a Sipp is very difficult.
I am tempted by Fidelity's Sipp, because of its low £45 fee for holding investment trusts and ETFs, but I'm deterred by its 0.1 per cent dealing fee. If applied to all of my £550,000 fund, I would face a set-up fee of £550.
I am attracted by Alliance Trust's discounted low dealing fee but put off by its £306 annual cost. The appeal of the other options falls somewhere between these two.
When I started this exercise, I had expected to opt for either Alliance Trust - on the grounds that I know the trust well and have been happy with its services - or AJ Bell, which I have always considered one of the Sipp experts.
Having met my Hargreaves Lansdown adviser, I was impressed by his knowledge and the flexibility of the company's services.
However, having weighed up the different charges and bearing in mind that I intend to use investment trusts mostly, I have decided to opt for Fidelity's service. While Fidelity's dealing fees are high, the £45 a year flat fee for investing in trusts and ETFs is very attractive.
The saving compared with the other services is at least £150 a year, enough to trade £150,000 a year (although if I was switching investments, that would represent sales and purchases of £75,000). That is more trading than I am likely to do.
In my next diary, I will look at the investment choices for my pension pot.
SIPP COSTS COMPARED
To compare prices, I considered three sales of £25,000 each, reinvesting the same amount each time into a different fund, making a total of six transactions. I am assuming the entire holding is in investment trusts.
At Fidelity that would cost 0.1 per cent of £150,000, which is £150, plus the £45 annual charge, so £195.
At Alliance Trust there would be six transaction fees, but only two would be chargeable, as the annual fee includes four free trades a year. At my discounted rate of £7.49 per transaction, this would amount to just under £15.
Those with no loyalty discount would pay £9.99 per trade, just under £20. Add in the £342 annual charge and that would be £357 with the maximum loyalty discount, £364 for new customers.
At Hargreaves Lansdown my annual cost would be capped at £200. I would not get a loyalty discount, so the six trades would cost £11.95 each, or £71.70, for a total of £271.70.
At AJ Bell I would pay £200 in fees: a £100 custody charge and £100 for making monthly withdrawals. The trading charges would be £9.95 each, or £59.70, for a total of £257.70.
At Interactive Investor the annual charge would be £192 and withdrawal charges £204, a total of £396. That would include two free trades, with the other four charged at £10 each, or £40, for a total of £436.