Vanguard pension: everything you need to know (Ad)

Growing your pension pot

Here’s everything you need to know about the Vanguard SIPP launch, after Vanguard shared the details with me.

If you haven’t been hanging on with bated breath, this is the personal pension from Vanguard, the giant of low cost investing.

It’s a great deal with super simple fees, if you want to invest your retirement savings in Vanguard funds. Here are all the details!

Vanguard Pension Key Info

When? Early 2020 for investors who are building up their pensions

What? Pension using any Vanguard funds, but only Vanguard funds.

How much? 0.15% account fee + fund fees + fund transaction fees.

What else? No drawdown fees, reinvestment fees, exit fees etc etc. Stick to bulk trades, and you won’t even pay anything for buying & selling ETFs.

Max fees? Account fee capped at £375 a year across all accounts in your name, so nothing more above a £250,000 balance.

Minimum contributions? £500 lump sum or £100 a month or transfer an existing pension

Minimum for drawdown? £50,000 across all accounts, available during the 2020/21 tax year

TL:DR Lowest cost for small pension pots, highly competitive on larger balances, brilliant deal for drawdown as no extra charges.

Where do I sign up? Here!

Pin for later:

When is the Vanguard pension launch?

From early 2020 you can start a new pension or transfer an existing pension.

Drawdown aka withdrawals will be available during the new 2020/21 tax year.

What is a SIPP anyway?

OK so the Vanguard SIPP isn’t actually a fancy water bottle brand, but a pension. SIPP stands for ‘self-invested personal pension’.

With a SIPP, you get the freedom to pick the investments to put in your pension, rather than relying on a pension company to choose for you. A SIPP is generally a personal pension you open yourself, rather than a pension at work.

Some SIPPs allow you to use weird and wonderful investments, including commercial property. These ‘full’ SIPPs tend to charge accordingly. But most SIPPs are simpler, with lower costs. Vanguard offers a ‘simple’ SIPP.

SIPPs are super flexible when you want to get hold of your pension money, after reaching 55. Pension rules allow you to take out as much as you like, whenever you like, while leaving the rest of your money invested.

SIPPs put you in charge of your financial future, and if there’s any money left in your pension pot when you die, it won’t get hit by inheritance tax.

But (channelling Spider-Man) with great power comes great responsibility. You’ll need to manage your investments during retirement, and watch how much you take out, or you could run out of money (more here).

As with any stock market investments, your balance can go down as well as up, and you may get back less than you put in.

If you would prefer the peace of mind from retirement income guaranteed to be paid for the rest of your life, consider using your pension money to buy an annuity instead. Annuity rates are low, but there’s no need to manage investments and no risk of running out of money. Otherwise, read on to find out more about the Vanguard pension.

Think big

Why Vanguard?

Vanguard is one of the biggest asset managers on the planet. Founded more than 40 years ago, it has weathered multiple financial storms and cycles. It’s owned by its US customers, via the funds they invest in, so can use profits to cut costs. Plus, it’s a Which? Recommended Provider, as the top-rated investment platform for customer satisfaction and value for money.

Vanguard is able to keep costs low partly because it’s massive, and partly because many of the investments it offers are ‘tracker’ funds, also known as passive funds or index funds.

Tracker funds aim to match or ‘track’ the performance of a particular index, like the FTSE 100 index of Britain’s biggest companies. Typically, tracker funds cost less because they replicate the market, unlike actively-managed funds which pay fund managers to pick investments, trying to beat the market.

How much do I need to open a Vanguard pension?

Two choices:

• Start a new pension with minimum of a £500 lump sum, or £100 a month, or a combination of both
• Transfer an existing pension

Plus don’t forget the FREE MONEY when paying into pensions. For every 80p a basic-rate taxpayer puts into a pension, the government will add another 20p in basic-rate tax relief. Kerching!

Higher-rate (40%) or additional-rate taxpayers (45%) can then claim back a further 20p or 25p respectively via their tax return.

Even if you don’t pay any tax at all, you can still pay £2,880 a year into a pension, and see it topped up with a chunky £720 to £3,600.

Otherwise, the maximum most people can put into a pension each tax year is 100% of earnings, max £40,000.

Previous post: What is a pension and why you should care

What investments can I put in the Vanguard SIPP?

With a SIPP, you decide which company to use, then decide which investments to buy. Your pension account is just the bag you use to hold your investments, which helpfully adds tax relief and shields any investment growth from income tax and capital gains tax.

You can put any of the investments on Vanguard Personal Investor into a Vanguard SIPP – but ONLY Vanguard products. Waves to investment nerds: yup I do mean all 76 of Vanguard’s active and passive funds and exchange traded funds (ETFs).

Remember when M&S Food Halls only stocked Marks & Spencer brand food? Like that.

So if you want to choose any of the thousands of funds and shares from other companies, you’ll need a different SIPP. Nor does Vanguard offer advice on what to choose – it’s up to you.

You can buy Vanguard investments on other platforms, but this may be more expensive, which brings me to:

Lower costs = more money for retirement

What does the Vanguard pension cost?

The big news is that the fees on the Vanguard SIPP are super simple, as well as low cost.

Forget pages of fees that make comparing pensions migraine-inducingly difficult.

The Vanguard pension just charges account fees + fund fees + transaction costs. 

Even if you use a type of investment called exchange traded funds (ETFs), you can avoid dealing fees if you stick to bulk trading.

Otherwise, there are no other fees, not even when you reach 55 and want to start taking money out. With no exit fees, you can open a Vanguard SIPP comfortable that if you change your mind, you won’t pay a big bill for moving elsewhere.

Let’s look at each of the fees in turn:

Account fees

When investing, normally you pay charges for the company or platform, and charges for the funds you hold. Think of it as paying for the bag, then paying for whatever you put inside.

The Vanguard SIPP charges a teeny tiny platform fee, known as the ‘account fee’, of 0.15% a year.

It’s capped at a maximum of just £375 a year, so you won’t pay any extra account fees on balances above £250,000.

Plus the £375 cap applies across all investments in your name, whether in a SIPP, an ISA or a general investment account. It’s not max £375 on the SIPP and another max £375 on your ISA, unlike some other investment websites with separate caps for different types of account (*cough* Hargreaves Lansdown).

Fund fees

You should also allow for fees on the funds you choose.

Vanguard is famous for offering low cost investments. Fund fees range from a tiddly 0.06% a year on a FTSE 100 tracker, up to 0.78% for a global emerging markets fund. The average fund fee is just 0.20% a year.

I’m a big fan of the Vanguard LifeStrategy range, as a simple low cost one stop shop for new investors. The five different LifeStrategy funds charge 0.22% a year in fund fees.

Previous post: Which Vanguard LifeStrategy fund is right for you?

Vanguard also offer Target Retirement funds, which gradually switch investments from frisky shares to steadier bonds as you near retirement, and charge fund fees of 0.24% a year. 

Transaction costs

These are the costs when the fund itself buys and sells investments. Think around 0.04% to 0.05% a year for Vanguard funds.

Total fees

Let’s put the pension costs in pounds and pence.

Say you use a Vanguard Target Retirement fund in your Vanguard SIPP.

Your total annual costs will be 0.43% a year, based on:

• 0.15% account fee for the SIPP
• 0.24% fund fee for the Vanguard Target Retirement fund
• 0.04% transaction costs for the fund

So each year you’d pay:

£4.30 with a £1,000 balance

£43 with a £10,000 balance

£430 with a £100,000 balance 

£2,400 with a £1,000,0000 balance (mostly fund fees, as account fees are capped at £375)

No drawdown costs

Drawdown refers to taking money out of your pension.

Crucially, the Vanguard SIPP doesn’t charge any extra to take money out, once you pass 55.

You will need a minimum balance of £50,000 to start withdrawals, but you’ll pay exactly the same account fee, fund fees and transaction costs as when building up your pension pot.

(Note the £50,000 minimum applies across all your accounts on the Vanguard website, so if you have an ISA, for example, you could start drawdown with a smaller pension pot)

Elsewhere you can face multiple charges just for getting hold of your own money – to set up drawdown, annual admin charges, fees for one-off payments and so on. 

The city watchdog, the Financial Conduct Authority, has complained that drawdown pensions can have as many as 44 charges. The Vanguard SIPP slashes that to just three.

Drawdown will be available in the new 2020/21 tax year whether as income or one-off lump sums.

With the income version, officially known as ‘flexi access drawdown’, you can take out up to 25% of your pension pot tax free, and anything else is taxed as income. The alternative, if you can resist whipping out 25% tax free at the start, is to opt for lump sums where each time 25% is tax free, and the rest taxed as income. 

Just beware that if you take out more than the tax free cash, the amount you can pay into a pension in future and still get tax relief will be cut to £4,000 a year.

Comparing platforms for your pension pot

How do the Vanguard SIPP costs compare?

The Vanguard SIPP is a pretty damn good deal over the lifetime of a pension – whether you are just starting out, have been saving for decades or are taking money out in retirement.

Vanguard came out as the cheapest SIPP for the average British pension pot of just over £40,000, according to independent researchers Platforum.

If you invested £40,000 in one of Vanguard’s Target Retirement funds, via the new Vanguard SIPP, it would cost £172 a year.

Put the same amount in the same fund in another SIPP – and Platforum calculate it would cost an average of £283 a year and nearly £400 on the most expensive platform.

By using Vanguard, the cost savings can roll up towards a more comfortable retirement. Fast forward 25 years, for example, and you’d be more than £9,500 better off than in the highest cost SIPP, assuming growth of 4% a year.

Jeremy Fawcett, head of Platforum, said: “The Vanguard SIPP is one of the lowest cost options on the market, especially for those at the beginning of their journey.”

When is the Vanguard pension cheapest? 

Hands up, the Vanguard SIPP is not the absolute lowest cost in every scenario.

I’ve pored over the Platforum spreadsheet, comparing Vanguard to 14 big SIPP providers. 

Basically, for lower balances the Vanguard SIPP works out cheapest due to the tiny 0.15% account fee. Then because the account fee is capped at £375 a year, it’s also great value on mega balances, even if it’s not always the cheapie cheapest. Crucially, once you start taking money out, Vanguard surges back to the top, because it doesn’t charge extra for drawdown.

But if you really want me to name names:

Cheapest on smaller balances

The 0.15% a year account fee on up to £250,000 with the Vanguard SIPP limbos lower than other percentage fee SIPPs, such as: 

• A.J. Bell Youinvest (0.25% up to £250,000 on funds)
• Cavendish Online (0.25%)
• Charles Stanley (minimum 0.35% up to £250,000 on funds)
• Fidelity Personal Investing (minimum 0.35% up to £250,000)
• Hargreaves Lansdown (0.45% up to £250,000 on funds, although if you stick to shares, the maximum is £200 a year).

Looking at the robo advisers, pension account fees start at 0.45% to 0.75% with Nutmeg. PensionBee’s fees, which admittedly bundle together the fees for the account and funds, start from 0.5% to 0.95% a year.

Competitive on bigger balances

Fixed fee SIPPs swallow a hefty chunk of small balances, but as your balance gets bigger, they become better value than paying a percentage.

The maximum account fee on the Vanguard SIPP is £375 a year, but Halifax Share Dealing, iWeb (which is owned by Halifax), the Share Centre and Interactive Investor all charge lower fixed fees for their pension platforms.

This means it can become cheaper to invest in Vanguard funds via another SIPP, rather than directly through Vanguard itself, once your pension pot is bigger than:

• £115,200 for the Share Centre SIPP (£172.80 a year)
• £120,000 for the Halifax Share Dealing and the iWeb SIPPs (£180 a year)
• £159,920 for the Interactive Investor SIPP (£239.88 a year with cheapest of the three service plans)

Source: Platforum for custody/platform fees, Much More With Less analysis for balances

Note this comparison just looks at platform / account fees. In practice, savings compared to Vanguard could be whittled away by any extra charges by the fixed-fee platforms, for example when buying or selling investments, reinvesting dividends or holding an ISA as well.

Cheaper for drawdown

Once you start taking money out of your pension, Vanguard bounces back, because it doesn’t charge anything extra for drawdown, when available during the 2020/21 tax year. 

The four fixed-fee platforms above all whack on annual charges for drawdown, or charges each time you take an ad hoc payment. For flexi-access drawdown, for example, add fees of £120 a year at Interactive Investor, £180 a year at Halifax Share Dealing and iWeb or £234 at The Share Centre.  

To be fair, Hargreaves Lansdown and Fidelity Personal Investing don’t charge anything extra for drawdown either, but their account fees for funds are more expensive than at Vanguard.

Saving a nest egg for retirement

Vanguard pension: The verdict

If you’ve reached this far – congratulations! It’s been a mammoth read. 

The Vanguard SIPP is a great deal with super simple fees. 

Stripping charges down to just three fees is a breath of fresh air, compared to hideously complicated fees elsewhere.

The low costs make Vanguard’s SIPP a bargain particularly for smaller balances and great for drawdown, even if it isn’t hands down cheapest for every scenario. High charges really mount up when investing over decades, so transferring old pensions to a lower-cost SIPP could save thousands.

However, the Vanguard SIPP is only suitable if you’re a fan of Vanguard funds, as you can’t choose anything else. The website is similarly stripped down and functional – no emojis, gifs or colourful cartoon characters here, and Vanguard doesn’t offer an app.

So if you’d like to choose between thousands of investments, you’ll need to look elsewhere. Equally, if you don’t want to choose at all, Vanguard doesn’t offer a questionnaire to guide you towards a suggested portfolio.

But the Vanguard SIPP is great for DIY investors confident about picking a portfolio from Vanguard funds. Newbie investors can also use the LifeStrategy and Target Retirement Funds to do the hard work for them.

And if you’ve been waiting for the Vanguard SIPP launch, you can finally open one from early 2020! Sign up here to be emailed when the SIPP goes live.

Now – over to you. Have you been waiting for the Vanguard SIPP? Anything else you want to know?

This is a collaborative post with Vanguard Asset Management.

Check out Vanguard’s article about the SIPP.

As with any investment, your pension can go up as well as down and you may get back less than you put in. Pension decisions can make a big difference to your financial future. Do consider getting free guidance from the government’s Pensionwise or paying for professional advice. To find a local independent financial adviser, try Unbiased.co.uk and VouchedFor.co.uk.