Investors who opt for this self-invested personal pension will be limited to putting their retirement savings into Vanguard funds, which are overwhelmingly from its passive range.
Savers seeking a cheap place to grow their nest eggs can pick from a new kid on the block, as fund giant Vanguard enters the self-invested personal pension (Sipp) market.
The passive investing behemoth says that its Sipp is now the lowest-cost Sipp available to UK savers. Its claim cites analysis by Platforum for the average British pension holder not yet in drawdown with a pot of £40,500.
Pension investors will pay 0.15% a year to save with the Vanguard Personal Pension, capped at £375. The cap applies across all Vanguard accounts in an investor's name, including Isas and general accounts.
On top of the account fee, savers will pay charges for the funds that they invest in, transaction costs, and other fees associated with its exchange traded funds (ETFs).
Investors will have 77 funds and ETFs to choose from, including Vanguard's Target Retirement fund and LifeStrategy range.
However, investors will be limited to putting their retirement money into Vanguard funds – overwhelmingly from its passive options.
This has prompted critics to say that its so-called Sipp flies in the face of the pension’s original purpose to give retirement savers almost complete freedom in where they invest.
To open an account, investors need to commit to a minimum contribution of £100 a month, or an initial lump sum of at least £500.
Currently, the Sipp is available only to those who are building up their pension savings. Drawdown options for those who want to take payments from their pension will be added in due course, according to Vanguard.
Sean Hagerty, head of Vanguard Europe, says: “We are very excited to launch the Vanguard Personal Pension, a pension designed to reduce the cost and complexity of saving for retirement.
“An individual’s savings often represent a lifetime’s effort, yet many investors and retirees lose out on their own hard work to high fees and charges.
“Fees can have a sizeable impact on investment returns, and consequently on the quality of life in retirement.”
Vanguard commissioned independent research company Platforum to calculate the Vanguard Personal Pension’s competitiveness compared with Sipps offered by 14 other leading platforms, across a range of investment scenarios.
The research found the Vanguard Sipp was the lowest-cost self-invested personal pension on the market for the average (median) British pension holder who has not yet drawn on their pension.
As an example, Platforum looked at the fees for an investor able to invest the maximum £40,000 annual Sipp contribution in one of Vanguard’s single-fund retirement solutions – a Vanguard Target Retirement fund.
The research calculated that an investor would pay just £172 a year in total charges including fund fees, transaction costs, and Sipp charges in a Vanguard Target Retirement fund through the Vanguard Personal Pension, compared to as much as £396 in total on the most expensive platform.
Mike Barrett, consulting director at the Lang Cat comments: “Normally, a fund group offering a direct-to-consumer service whereby you can only invest in their funds wouldn’t be significant, but this is no normal fund group.
“While initially this might only be attractive to Vanguard fans, I do think it could impact all platforms, and as such will be a hugely positive move for all investors.
“The main attraction of the Vanguard Sipp is its price. It’s among the cheapest (but not ‘the’ cheapest, that’s iWeb) way to invest your pension. Even if rival platforms don’t come under direct pressure with assets moving to Vanguard, I expect them to come under pressure to reduce their own platform fees to be more in line with the level set by Vanguard.”
Commenting on the long-anticipated launch of the Vanguard Sipp, Rebecca O’Keeffe, head of investment at interactive investor, Money Observer's parent company, said: “We welcome choice for investors, and this launch is an important conversation-starter. Ultimately, investors have another incentive to review how much they are paying to help find a platform that suits them best.
“Most of all, we welcome the idea that investors will be better off in retirement if they pay attention to the overall fees they are paying in order to minimise their costs and maximise their financial future.
“Our customers benefit from a wide range of choice, with the average ii Sipp made up of 17% direct equities, 37% funds, 24% investment trusts and 8% exchange traded products, alongside cash. Nevertheless, Vanguard funds are extremely popular on our platform, where a flat fee is a natural choice for those who want to invest in low-cost tracker options. Who wants to double or treble their passive fund costs with a percentage-based platform fee?
“One other consideration for investors is ethical investing, given the expanding interest in this market. Ethical investing naturally lends itself to more active investment rather than passive options. Yes, there is an opportunity to choose a passive ESG option that avoids certain sectors, but many investors may want the opportunity to invest in ethical funds that embrace socially responsible or ethical options. For these investors, choice will be key and they are likely to want access to the whole of market.”
This article was first written by our sister magazine Moneywise.