We finally have details on the Vanguard SIPP which will launch early 2020. It has been a long time coming, but if it launches on time, and Vanguard says it's very confident that it will, it will set a new standard for low-cost self-invested pensions with few hidden costs, a low platform fee and simplicity.
In this blog we look into the Vanguard SIPP in detail and interview Andrew Marker, Head of Retail Pensions from Vanguard UK and Mark Polson of The Lang Cat to hear what they have to say about the new offering.
What is a SIPP?
A SIPP is a Self Invested Personal Pension and if you want to learn more about these and how they are different from ISAs then there is a video all about this in my UK Investment for Beginners playlist (here)
For the purpose of this blog I will explain the key points you need to understand about a SIPP.
Below is an illustration with a lifeline starting at age zero when you're born, going up to the age of 86, which is the average UK life expectancy.
Your pension tends to come in two phases. The first phase is when you start work you're going to start accumulating a pension and the size of that pension pot grows as you get older.
The second phase of your pension is called drawdown. At age 55 you can take out a lump sum in your pension but as you take money out of your pension the size of the capital reduces. Ideally the money won't run out before you die.
The money is locked up in a pension until you're 55 and then at 55 it's released so that you can take money out.
Vanguard SIPP - Key Information
Below is the announcement from Vanguard and the most important thing is that the fee is 0.15%.
There is also a really important footnote that states that it's capped at £375 and that applies across all your holdings on Vanguard. That includes your SIPP, ISA and general account, but it doesn't include the Junior ISA for your children.
As with the Vanguard ISA, you can only invest in Vanguard funds. For me that's not a problem because I tend to stick to fairly standard funds but if you want something more esoteric then this might not be for you.
The minimum investment amount is very small, so you can either pay a lump sum of £500 or you can put in £100 pounds a month.
The announcement also includes a release date which is early 2020 but that only applies to investors who are accumulating their pensions. If you are in the drawdown phase then the product for you will become available in the 2020/2021 tax year.
You can see below that with Vanguard not only is the fee very low but you also don't pay at all for transactions when you buy and sell products.
The only time you do have to pay is when you use the quote and deal service for ETFs and you can see more details about that in my blog on how to open a Vanguard account
The illustration also lists all the things you don't have to pay for. There is no wrapper charge, no setup charge, no exit fee, no transfer fee into the fund and you don't have to pay for valuation statements.
Additionally you don’t have to pay for a lot of life events such as what happens when you die or get divorced. This really throws down the gauntlet for other platforms which do charge you for these niggly little things.
What I've shown below is the fee you pay in pounds versus the amount you've got invested with Vanguard.
You can see from the diagram that if you invest a very small amount you pay a very small fee, but they've capped the fee at £375 per year. This means if you invest £250k or more then you'll hit that cap and you won't have to pay any more in fees.
As a percentage of the amount you invest per year the fee is 0.5% but when the cap kicks in you're paying less and less as a percentage as the amount your investment increases.
Based on the latest data from HMRC, illustrated below, that wasn't much of an issue for most people because the average size of an ISA was between £25k and £30k.
So for that average investor, whose fee will be around £37.50 a year, the cap was never very helpful. But now that the amount invested includes both the SIPP and the ISA, I suspect more people are going to be interested in this cap because as you get to later life you will have more money invested.
If you want to find out more about Vanguard's products I've written a Review of Vanguard's LifeStrategy Funds
Vanguard SIPP vs Other providers
There's a great company in Scotland called The Lang Cat and they provide beautiful guides such as the one below published in 2018.
This heat map illustrates the fee you pay based on the amount of money you invest in Self Invested Personal Pensions in the UK.
It lists the SIPP provider on the left-hand side and the amount you invest is along the top. Green means the fee is fairly low and red means it's fairly expensive for the amount invested.
Notice how if you invest more money the platforms which charge a fixed fee in pounds become the cheapest. If you invest a million pounds, the Halifax fixed fee for their SIPP amounts to just 0.02% of the amount invested per year, whereas a company which charges a percentage fee becomes much more expensive.
Now let's look at where Vanguard will be cheaper than these platforms.
If you invest less than £100k Vanguard is cheaper than all of these platforms. If you invest more than £250K Vanguard in many cases is still cheaper, It is just the fixed fee platforms where Vanguard doesn't compete.
If you have an independent financial adviser they often have their own platforms onto which they put your money. The Lang Cat also reviews these independent financial adviser platforms in the form of heat maps.
If we block out where Vanguard is cheaper this will be the case for most people, certainly if you invest less than £150k and often if you invest more than £250k.
It's no accident that Vanguard uses Nelson's flagship as its logo as, make no mistake, this is war and it's a war that's good for you and me! it's a price war that will make platforms more competitive in the future.
In fact looking at those heat maps reminds me of the game Battleship. With this announcement I expect Vanguard will ultimately sink many of its competitors. But of course it will depend on the quality of service which Vanguard provides, as a platform is not just about cost.
Interview with Mark Polson of The Lang Cat about the Vanguard SIPP
Mark Paulson is the head honcho over at The Lang Cat and this is what he had to say about the Vanguard SIPP announcement.
Mark, Lang Cat; "The Vanguard SIPP is definitely sharply priced but I think we're in danger of saying it is the cheapest in all possible circumstances absolutely everywhere and that isn't necessarily true. But, do you know what? It is extremely well priced and it's going to cause some furrowed brows around lots of different places.
A couple of things to bear in mind, first of all it's taken Vanguard a jolly long time to come out with this. I think I remember hearing from them how great their SIPP would be about two or three years ago. I was very much looking forward to it very much, but it is a good thing that I wasn't waiting for it before I had my lunch because I'd be pretty hungry right now!
So we hope it's worth the wait and that’s an important point. Because what the UK financial services landscape tells us, particularly for direct investors, is that price generally is a really bad determinant of flow and success.
The cheapest things are often not the best supported things. Very often the most expensive things are by far and away the most supported things.
It is like a market in reverse. People go to St James's Place on the advice side and Hargreaves Lansdown on the platform side if you're a direct investor.
These are, I'm going to be friendly and say "premium" propositions, I believe premium is a word that people use when they mean that things cost a lot.
The reason I think that people go with those providers is because they perceive that there is going to be great service. They may feel that they are with a reliable name that’s been trusted and tried by their their friends and colleagues and it feels like a low risk option.
Vanguard is a huge name, but not necessarily that well known by the British investor at the moment. Those of us in the industry feel completely fine with Vanguard, of course we do, I think it's got the GDP of a large country under administration but it doesn't necessarily follow that something cheap will be well supported so we'll have to wait and see."
Interview with Andrew Marker, Head of Retail Pensions from Vanguard UK
Ramin, PensionCraft; "Why has Vanguard introduced this product to the market?"
Andrew, Vanguard; "Vanguard was looking to really help investors that's one of our key things. We acknowledge that pensions are probably one of the largest savings vehicles that people have in the UK, so we wanted to introduce a pension that will be delivering a low cost simple SIPP that will help investors reach their retirement goals."
Ramin, PensionCraft; "Why have Vanguard split the Vanguard SIPP product into two launch dates, one for accumulation and one for drawdown?"
Andrew, Vanguard; "There are two reasons. Looking at our current client base we think the majority of our investors at the moment are building up their pensions. It is growing into the decumulation space but there are a lot more savers out there and we wanted to ensure that we delivered a low cost simple SIPP to help those saving investors.
We have also acknowledged that we are getting closer to the tax year when this launch is happening. There will be customers who will be trying to transfer into drawdown to try and access their taxable income towards the end of the tax year. We didn't want to put those customers at risk of not achieving this, as transfers can take some time in the market.
Another reason for splitting the decumulation date was that we were cognisant of the fact that investment pathways are coming along at the moment. We really wanted to get our drawdown solution to work with them, so we decided to put that into the new tax year rather than in this current tax year."
Ramin, PensionCraft; "There's been a lot of frustration amongst my clients, the PensionCrafters, who were very desperate to get on to a SIPP provided by Vanguard and their low fees. Why has it taken so long and why were there so many delays?"
Andrew, Vanguard; "Yes it has taken longer than we would have liked. What we are trying to do at Vanguard is really look at how we simplify pensions. We understand pensions are very complex, we know our customers find buying pensions very complex, so it's taken a bit longer for us to try and simplify that. That simplification has been one of our key goals; How do we simplify the online journey, because it is a fully online pension. It is not just targeting sophisticated investors but it's actually targeting all investors who might not be as sophisticated.
The other really key thing that we focus on at Vanguard is making sure it's right for customers. We have spent a lot of time testing to ensure that it is 100% right for customers and we're getting very close to that now."
Ramin, PensionCraft; "Are you fairly confident that you will hit the deadlines this time? The beginning of next year for the accumulation product is a fairly loose deadline"
Andrew, Vanguard; "We are fairly confident. We are in the very final stages of the test execution at the moment and it is looking very good from our point of view. So yes we're very confident!
We wouldn't have released it out to our clients and tell them about it if we weren't confident."
Ramin, PensionCraft; "I've been with Vanguard for a while now and one of the things I like about the Vanguard platform is the service. There is always a very quick reply to my questions. How does that work?
I've heard that the senior managers also man the phones just to get a feel for what's going on on the ground. Is that true?"
Andrew, Vanguard; "Yes absolutely, service is key to us at Vanguard. Everything is about delivering for our clients, that's effectively what we live for.
What we've done for pensions is we have added additional experienced pensions people on the phones to help with those calls.
We really have acknowledged that people are going to call in and ask more questions about pensions because they're complicated, even though we've tried to simplify it. So we have put more people on the phones in order to be able to answer questions in a quick time frame.
Yes we do have senior managers sit on the phones on regular occasions and speak to clients. You have to listen to the clients and speak to them one to one to understand what’s going on."
Will financial advisers lack the incentive to recommend the Vanguard SIPP to their clients?
The final point, which is made by Mark Polson from the Lang Cat, is an interesting one.
It relates to the mechanisms that independent financial advisers have on their own platforms which allows their clients to pay their fee straight off the platform. This is not in place for Vanguard, so a client would have to pay them separately which may be an incentive for advisors not to put you onto the cheaper platform.
So here is Mark describing it in his own words.
Mark, The Lang Cat; "This is about which tail wags which dog!
If an adviser is going to recommend something like Vanguard LifeStrategy or a Vanguard Target Retirement fund then why wouldn't they use the Vanguard platform? The answer is that at the moment the Vanguard platform at the moment isn't really set up for advisers, and specifically it can't pay adviser fees from the clients’s pot.
You have the chance here to get your Vanguard LifeStrategy fund held in a structure which might charge half or less than where you are at the moment. Now that's pretty compelling; like for like but half the price!
Assuming that the Vanguard pension works well and assuming that when it gets drawdown then that works well (and there's no reason to think it won't), then I think advisers are going to have to have a really good think about how they present this to clients.
Just imagine ...”You can choose this one Mr Client, where you can pay me through the pension and you don't need to worry. Or you can choose this one Mr Client, where you have to write me a cheque (pay me an explicit fee) but we cut your custody fees in half. Which would you rather do?”
Vanguard have given us all kinds of things to think about so it's a great development. Lots of fun and lots of trouble making, which we love to see.
I suspect Vanguard won't be the only story here. I've been watching the US very closely where now trading and custody is often free as long as you're using the funds from the provider. So the next step in this fight is free."
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