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Vanguard to launch the cheapest-ever pension in 2020: should you invest?
Vanguard, one of the world's largest fund managers, is set to launch the UK's cheapest ever pension in 2020 - but how does it work and could it help you save more for retirement?
With an account fee of just 0.15%, capped at £375 a year, Vanguard Personal Pension brings a new level of competition to the pension market.
Vanguard's self-invested personal pension (Sipp) is designed to help the UK's five million self-employed workers as well as anyone who wants to consolidate several pension pots into one place.
Here, we look at how Vanguard's pension works and if it could help you boost your pension savings.
What is a Sipp?
A Sipp is a do-it-yourself pension that enables you to choose what investments you want to put your money into and keep control of your savings.
Sipps can be managed online and they allow you to see how much money's in your pension and where it's invested.
Sipps allow you to invest in a variety of assets including stocks and shares, investment trusts and exchange-traded funds (ETFs).
Watch our short video below for more info on how Sipps work.
What does the Vanguard Personal Pension offer?
The Vanguard Personal Pension is a Sipp open to savers aged 18 or over who live, and pay tax in the UK, as well as having a UK bank account.
The Sipp allows you to choose from 76 funds and ETFs and will be available from early 2020.
Initially, Vanguard Personal Pension will only be open to investors that have not started to draw down from their pensions.
Vanguard hopes to make the Sipp available to those savers during the 2020-21 tax year.
You must open an account with a lump sum of £500 or make a £100 a month contribution under a regular savings plan.
- Find out more:is a Sipp pension for you?
Will this be the cheapest Sipp on the market?
Most investment platforms charge a fee to use their services. The industry average is around 0.35% of assets, according to an independent analysis by Platforum, an investment information company.
Vanguard Personal Pensions will charge 0.15%, capped at £375 a year. The account also has no additional costs such as exit fees, valuation statements or transfers.
If you invested the maximum tax-free annual allowance of £40,000 in a pension, the Vanguard Sipp would charge £172. The current industry average for fees is £283, while the most expensive platform would impose charges of almost £400.
Compounded over decades, these fees really add up and eat into your pension savings pot over time.
The table below shows how much of pension would be left after different levels of annual fee are applied.
| Annual Management Charge (%) | How much of your pension is left after charges (%) | ||||
| 1 year | 5 years | 10 years | 20 years | 30 years | |
| 0.15 | 99.85 | 99.25 | 98.51 | 97.04 | 95.60 |
| 0.25 | 99.75 | 98.76 | 97.53 | 95.12 | 95.77 |
| 0.35 | 99.65 | 98.26 | 96.55 | 93.23 | 90.02 |
| 0.5 | 99.5 | 97.52 | 95.11 | 90.46 | 86.04 |
| 0.7 | 99.3 | 96.55 | 93.22 | 86.89 | 81 |
| 1 | 99 | 95.1 | 90.44 | 81.79 | 73.97 |
Source: Vanguard (Data assumes a 0% rate of return and does not account for market movement)
- Find out more: see how Vanguard ranked in our best and worst investment platforms
How much could you save with the Vanguard Personal Pension?
The Vanguard Sipp could save you thousands on your pension.
A 43-year-old with a pension pot of £40,500, invested for the next 25 years with the Sipp in the Vanguard Target Retirement fund (which has a 4% annual return), could save almost £10,000 compared with the most expensive Sipp provider on the market.
- Find out more: how much will you need to retire?
Who is the Vanguard Personal Pension good for?
The Vanguard Personal Pension could be great option if you're self-employed.
While traditional workers have benefited from auto-enrolment, a scheme which makes it compulsory for employers to automatically enrol eligible employees into a workplace pension, there isn't a similar framework for self-employed workers.
This has resulted in self-employed workers not being able to save enough for retirement. And a recent study found that only a quarter of self-employed workers were saving into a pension.
Should you open a Sipp?
If you're thinking about opening a Sipp it's important to make sure you're comfortable with making your own investment decisions.
Certain investments are riskier than others and may not be suitable for your retirement savings portfolio.
It's always worth seeking independent financial advice before making a decision about investing your money.
You can also discuss other savings options like a personal pension or a stakeholder pension, which may be more suitable.
For those aged 18-39, a lifetime Isa could also help you save money for retirement too.
