GPP vs SIPP

[Lynx]

I am aged 32 and presently earn a base salary of £110k with 6% employer pension contributions on top of that, and a performance-related bonus of around £10k-40k. I studied Engineering, work in the field of Intellectual Property and am not particularly risk averse. I know very little at present about investing, but I like the idea of learning about it and being in control. I have a wife with no expected income and no children although we hope to have children.

Mindful of my present remuneration only, I intend to invest everything I earn above £100k into a pension fund to prevent losing out on my personal tax allowance. From my rough calculations this will allow me to reach a pension investment of around £1m at the age of retirement, which seems to be around the lifetime allowance mark and enough to provide a retirement income of £40k p.a.

Whilst I feel reasonably confident about the above, I am not confident about which pension fund to invest in.

I have just moved to a new employer and have been provided details of the GPP, which is based on this Aegon pension fund:

GB00BYM30711
UK equities 25.0
UK corporate bonds 20.5
UK government bonds 20.2
North American equities 15.7
European equities 4.6
Japanese equities 2.5
Asia Pacific (ex Japan) equities 2.2
Other 7.8
Cash & equivalents 1.5
markets.ft.com/data/funds/tearsheet/summary?s=GB00BYM30711:GBP

My understanding is that this fund may be overly conservative for me, and there is a management fee of around 1% I believe, which may be on the high side?

I am beginning to wonder about seeing whether my employer will let me set up a SIPP (and pay the 6% contributions into that), and if not I presume I can keep the Aegon product for the 6% and put my >100k sacrifice into a SIPP.

I like the idea of SIPP owing to the low fees and being in control, and if it fails you have yourself to blame.

In terms of SIPP I understand that traditional employer-provided pension funds do not often beat tracker-based SIPPs, and so I am wondering about setting up a SIPP based on a FTSE world tracker. Though I appreciate that diversification my be useful and that a phased risk approach might be a good idea, such as: 1) moderate-high risk for next 15 years; 2) low-moderate risk for subsequent 15 years.

I would welcome advice on any aspects of the above - am I right to question accepting my employer auto-enrolment Aegon-based fund, and to think about trying to set up a SIPP instead?

[TedSwippet]

I have just moved to a new employer and have been provided details of the GPP, which is based on this Aegon pension fund...

This is probably the GPP's 'default' fund rather than the only option, and if that's the case then you may have more freedom in here than you think.

With that in mind though, this fund looks like a pretty decent moderate-risk default fund to me. 60% stock and 40% bond. It has a high UK bias -- the UK is below 6% of world stock market cap but here it represents nearly half the equity element -- but this isn't a fatal flaw. Overall it looks a lot like the Vanguard LifeStrategy 60% fund, and that's no bad thing. It does however move from equities to bonds as you near retirement, something that was useful when people bought annuities but somewhat out-of-fashion in the modern drawdown era.

My understanding is that this fund may be overly conservative for me, and there is a management fee of around 1% I believe, which may be on the high side?

60% equities perhaps doesn't reach 'aggressive', but nor is it 'timid', exactly. How much stomach do you have for volatility? If you could see 50% of your funds evaporate over a year and not blink then 100% equity might work for you. If you would bolt and sell to cash at a 10% to 20% drop in prices, 60% could be not conservative enough. So you need to evaluate your ability to tolerate market risk. Meanwhile, 60/40 isn't a bad place to sit while you ponder your options (nor indeed all that bad historically if you never move from it).

As for fees, quite a few GPP groups and funds show a 1% or similar notional fee but there are often (very often) discounts. Check your scheme documentation carefully, and/or ask the scheme or employer. It is quite possible you actually pay less than this. Sometimes this discount arrives in the form of added units to your pension each month.

I am beginning to wonder about seeing whether my employer will let me set up a SIPP (and pay the 6% contributions into that), and if not I presume I can keep the Aegon product for the 6% and put my >100k sacrifice into a SIPP.

Very few employers will pay into a SIPP for you. If every member of staff had a different pension provider their payroll would explode in complexity. Hence the GPP, for everyone. Again though, you may find that your GPP has plenty of options and skimpy enough charges that it's fine overall. And if you get salary sacrifice with your employer chipping in some of their NIC saving along with employer matching then it is highly unlikely that even the cheapest SIPP could undercut a GPP with those benefits.

In terms of SIPP I understand that traditional employer-provided pension funds do not often beat tracker-based SIPPs, and so I am wondering about setting up a SIPP based on a FTSE world tracker. Though I appreciate that diversification my be useful and that a phased risk approach might be a good idea, such as: 1) moderate-high risk for next 15 years; 2) low-moderate risk for subsequent 15 years.

But the fund you reference in your Aegon pension is the "Aegon Balanced Tracker" and it's globally diversified, so is precisely the sort of thing that you propose to buy in a SIPP, perhaps absent the 'lifestyling' shift from equity to bonds as you reach retirement. Put differently, you already have a tracker-based GPP; a tracker-based SIPP would be a distinction without a difference.

I would welcome advice on any aspects of the above - am I right to question accepting my employer auto-enrolment Aegon-based fund, and to think about trying to set up a SIPP instead?

It seems reasonable to understand fully the GPP that you are in. But I certainly wouldn't jump to any conclusions that a SIPP alongside or instead would be an improvement. My guess is that your GPP is a decent enough one, and after factoring in the charges of a SIPP and the probable loss of salary sacrifice and employer match benefits you will find that sticking with the GPP, at least while with this employer, is going to be the best course.

[TUK020]

A while back I was in a similar position and wound up staying in the company scheme, to obtain the employer contributions, but then running a separate SIPP and paying into this a lump sum every March, to manage my tax threshold.
On leaving the company, I then transferred the company pension into my SIPP

Having a separate SIPP is useful for several reasons:
a) it gives you a demarcated sandbox to learn investing, while the company scheme manages the 'mainstream' piece of this.
b) at your age, it is highly unlikely that you are going to stay with the same employer until retirement. Having a SIPP already set up and managed gives you somewhere to transfer old company schemes to as you move, if you no longer want to keep the old company scheme in play.
c) Probably not relevant to you, as your company scheme is not DB, but it can be useful to have more than one pension scheme, to allow flexibility to take schemes at different dates.

[moorfield]

I am beginning to wonder about seeing whether my employer will let me set up a SIPP (and pay the 6% contributions into that), and if not I presume I can keep the Aegon product for the 6% and put my >100k sacrifice into a SIPP.

I would welcome advice on any aspects of the above - am I right to question accepting my employer auto-enrolment Aegon-based fund, and to think about trying to set up a SIPP instead?

I asked the same question of my employer too, they wouldn't.

However, there is a workaround I can suggest similar to TUK020: speak directly to Aegon instead, they should be able to do a partial transfer of funds across to a SIPP wrapper for you, while remaining open and continuing to accept future contributions from your employer.

My employer has been paying contributions into a group stakeholder plan which I've had parked in a cash fund. That amount became substantial enough recently that I've transferred most of it across to my SIPP for onward investment into my HYP shares. I've just completed the transfer process this week and it was surprisingly easy actually, and which I'll probably repeat annually now until I leave my employer.

[Blagdon]

I asked the same question of my employer too, they wouldn't.

However, there is a workaround I can suggest similar to TUK020: speak directly to Aegon instead, they should be able to do a partial transfer of funds across to a SIPP wrapper for you, while remaining open and continuing to accept future contributions from your employer.

Snap -- this is what I did a few years back -- worked fine.

[Lynx]

I have just moved to a new employer and have been provided details of the GPP, which is based on this Aegon pension fund...

This is probably the GPP's 'default' fund rather than the only option, and if that's the case then you may have more freedom in here than you think.

With that in mind though, this fund looks like a pretty decent moderate-risk default fund to me. 60% stock and 40% bond. It has a high UK bias -- the UK is below 6% of world stock market cap but here it represents nearly half the equity element -- but this isn't a fatal flaw. Overall it looks a lot like the Vanguard LifeStrategy 60% fund, and that's no bad thing. It does however move from equities to bonds as you near retirement, something that was useful when people bought annuities but somewhat out-of-fashion in the modern drawdown era.

My understanding is that this fund may be overly conservative for me, and there is a management fee of around 1% I believe, which may be on the high side?

60% equities perhaps doesn't reach 'aggressive', but nor is it 'timid', exactly. How much stomach do you have for volatility? If you could see 50% of your funds evaporate over a year and not blink then 100% equity might work for you. If you would bolt and sell to cash at a 10% to 20% drop in prices, 60% could be not conservative enough. So you need to evaluate your ability to tolerate market risk. Meanwhile, 60/40 isn't a bad place to sit while you ponder your options (nor indeed all that bad historically if you never move from it).

As for fees, quite a few GPP groups and funds show a 1% or similar notional fee but there are often (very often) discounts. Check your scheme documentation carefully, and/or ask the scheme or employer. It is quite possible you actually pay less than this. Sometimes this discount arrives in the form of added units to your pension each month.

I am beginning to wonder about seeing whether my employer will let me set up a SIPP (and pay the 6% contributions into that), and if not I presume I can keep the Aegon product for the 6% and put my >100k sacrifice into a SIPP.

Very few employers will pay into a SIPP for you. If every member of staff had a different pension provider their payroll would explode in complexity. Hence the GPP, for everyone. Again though, you may find that your GPP has plenty of options and skimpy enough charges that it's fine overall. And if you get salary sacrifice with your employer chipping in some of their NIC saving along with employer matching then it is highly unlikely that even the cheapest SIPP could undercut a GPP with those benefits.

In terms of SIPP I understand that traditional employer-provided pension funds do not often beat tracker-based SIPPs, and so I am wondering about setting up a SIPP based on a FTSE world tracker. Though I appreciate that diversification my be useful and that a phased risk approach might be a good idea, such as: 1) moderate-high risk for next 15 years; 2) low-moderate risk for subsequent 15 years.

But the fund you reference in your Aegon pension is the "Aegon Balanced Tracker" and it's globally diversified, so is precisely the sort of thing that you propose to buy in a SIPP, perhaps absent the 'lifestyling' shift from equity to bonds as you reach retirement. Put differently, you already have a tracker-based GPP; a tracker-based SIPP would be a distinction without a difference.

I would welcome advice on any aspects of the above - am I right to question accepting my employer auto-enrolment Aegon-based fund, and to think about trying to set up a SIPP instead?

It seems reasonable to understand fully the GPP that you are in. But I certainly wouldn't jump to any conclusions that a SIPP alongside or instead would be an improvement. My guess is that your GPP is a decent enough one, and after factoring in the charges of a SIPP and the probable loss of salary sacrifice and employer match benefits you will find that sticking with the GPP, at least while with this employer, is going to be the best course.

Thank you so much for taking the time to answer my question so fully. This is an excellent post indeed.

I have a follow-up question:

I have since learnt that as suggested above, Aegon are flexible and I can easily switch fund from the default if I want to.

Should I?

Aegon sent me a form to change the fund and sent me a list of their available funds here:

https://digital.feprecisionplus.com/aegonportal

[TedSwippet]

I have since learnt that as suggested above, Aegon are flexible and I can easily switch fund from the default if I want to. Should I?

Assuming that you are happy to leave your investments alone and in passive tracker funds -- and history suggests that for most investors this is going to be the best approach; most people are their own worst enemies when trying to 'beat the markets' -- then staying where you are looks fine to me.

The only thing to watch is the lifestyling of the default GPP fund, but that doesn't kick in until six years before retirement, so probably close to two decades into the future for you, if not more depending on when you plan to retire. Plenty of time there to decide if you think lifestyling is actually appropriate for you or not, then.

If you were to switch, although the Aegon offerings are pretty decent overall, I don't see another single-fund multi-asset solution in here for you (although I could easily have missed something). That would mean holding three or four separate funds and rebalancing from time to time. I am generally a fan of BlackRock, so if it were me I might choose the BlackRock Aquila 40/60 Global Equity Index, Over 15 Years Corporate Bond Index, Over 15 Years UK Gilt Index, and Over 5 Years UK Index-Linked Gilt Index funds in a ratio of around 60%:13.4%:13.3%:13.3%.

But that really only mimics Vanguard LifeStrategy 60, and we already know that your current GPP default also looks close to this. A rather high UK bias as we have already seen, although it is possible to rationalise that by noting that the UK market is dominated by FTSE 100 stocks, and most are multinationals.

So no cost saving that I can see from switching, and you don't yet need to think about sidestepping the default fund's lifestyling. The only reason I can see for you to switch would be if you consider the default fund to be either to aggressive or too conservative.

These days, most pension default funds are actually pretty good (where 'good' is defined as moderately stock-biased trackers with low charges). This wasn't always the case, but the pensions mis-selling kerfuffle of the late 90s and early 2000s seems to have cleaned things up a fair bit.

[JohnB]

Don't be constrained by a £1m LTA, it is rising with inflation, and you will need a lot more than £1m for a decent pension in 30 years. If you can invest more aggressively, its worth getting back to HRT. Obviously your costs will rise with children, and you might want the satisfaction of paying off your mortgage, but a pension could save you a lot.

I'd not have bonds as a high earning 32yo for money you don't plan to access for 30 years.

[Alaric]

A while back I was in a similar position and wound up staying in the company scheme, to obtain the employer contributions, but then running a separate SIPP and paying into this a lump sum every March, to manage my tax threshold.
On leaving the company, I then transferred the company pension into my SIPP

That would seem a very sensible employer independent strategy. As suggested you might also be able to transfer out from the employer's scheme to the SIPP if you wanted more control over the investment decisions.