I want to establish a self-invested personal pension so that I can choose and control my own investments. As well as paying contributions to the Sipp, I want to transfer in some personal pensions that I have but these have quite substantial transfer penalties. Is it worth transferring?
Sipps are becoming steadily more popular and there are a number of reasons for this.
First, it is no longer expensive to establish and run a Sipp. It used to be thought that they were expensive products and only suitable for people with substantial pension funds. However, the entry level for Sipps is now very modest.
In the past, it was felt that you needed at least £100,000 to make such a plan economically viable but this is no longer the case. In other words, Sipps are now competing with traditional personal pension plans.
Second, the ability to control and monitor the performance of Sipp investments has become very easy to do. There are a number of low-cost online Sipps and many people now find that they are able to use these plans and make their investment choices with or without advice from an adviser.
Personal pensions were historically multi-charged products with policy fees, bid/offer spreads on investment units and, as you have experienced, exit fees. From your question, I suspect that you have this type of plan, which accounts for the transfer penalties that you describe.
When a policyholder seeks to transfer their policy value to another provider, the original plan provider seeks to recover the charges it has incurred and, in some instances, the charges it would have taken. In some cases, the transfer value can be a very low percentage of the current value of the policy.
The other type of exit charge often seen is the market value reduction in respect of unitised with-profits funds. This is a device used by product providers to ensure that with-profits fund members do not transfer away more than their fair share of the fund. It is usually applied during periods after poor equity market returns. The good news is that many market value reductions are being reduced or removed altogether.
Whatever exit charge your plan is experiencing, you need to consider whether it makes more sense to transfer or leave the plan value where it is. This can be done by your adviser who should have a system for projecting the future value of your current plan and comparing that with the possible future value of your proposed Sipp. The comparison will be done on the basis that both plans will perform at the same investment growth rate in future so that it is possible to compare plan charges.
Remember also that even if the Sipp you choose is low cost, it may still have some initial costs and at the very least there will be advisory fees that you have to pay.
If your proposed Sipp shows higher fund values than your current personal pension plan, that will imply that your current plan is highly charged. It may be worth transferring to the Sipp if that is the case. Charges are only one item to consider, however, and you also need to look at where your money is currently invested and how that might compare with where you intend to invest the money if you do transfer to the Sipp.
For many people, the prospect of being able to choose from the whole market of collective investment funds rather than a relatively restricted range is another driver for making the change and this needs to be balanced against the cost of a transfer.
There is an immediate possible downside to consider. In the event of your death, it is likely that it is the current value of your existing plan that will be paid to your beneficiaries. If you transfer, you have immediately reduced that value in the event of your death. This may or may not be significant for you but should be considered.
There are significant advantages to be gained by transferring to a Sipp and, with or without transfer penalties, it is well worth considering.
Nick Bamford is managing director of Informed Choice