Interactive Investor’s new low-cost pension plan could spark a price war in the industry. The investment platform is launching Pension Builder, a new self-invested personal pension (Sipp) for which savers will pay a flat fee of £12.99 per month, regardless of the value of their fund.
Flat fees tend to be more advantageous than percentage-based fees on larger pension funds. But Interactive Investor’s fees are low enough to be competitive for smaller funds as well. Analysis by Compare the Platform suggests that out of a £50,000 pension fund, only Fidelity Personal Investing and Vanguard would work out cheaper – although the latter offers a more limited choice of underlying investments. Of pension funds of £100,000 or more, Interactive Investor comes out on top.
Interactive Investor’s new pension is designed to appeal to both savers new to retirement and those transitioning from competing platforms. For the latter, it is possible to save money immediately, while for new savers the monthly fee of £12.99 will be more expensive than some plans in the early years, before saving money later.
The launch illustrates how investment platforms have changed the game for savers opening individual plans rather than (or in addition to) contributing to a work-based pension plan. Most platforms offer access to the same range of underlying investments – essentially any collective investment fund, as well as direct stocks – and features such as research and planning tools. What you are looking for is the cheapest offer for your level of savings.
Missing out on the best price can have a big impact on the value of your pension. Every pound paid in fees is a pound that you cannot invest or earn compound interest on.
Research from analyst Lang Cat, based on a 35-year-old man with a £100,000 pension pot who invests £10,000 a year for 30 years and earns an annual return of 5%, suggests that the least expensive today would offer a final retirement value of £1,191,737. At more expensive providers, the same saver would end up up to £53,000 less due to fees.
Making comparisons between platforms is not straightforward. They charge in different ways – some prefer a fixed cash fee while others charge a percentage fee. These platform fees are not the only fees to consider. There will also be fees payable when you make new investments or change your portfolio, and for other services. Like many plans, Interactive Investor charges fees such as dividend reinvestment.
Comparison sites such as Compare the Platform or Money to the Masses allow you to make comparisons based on your circumstances – how much your pension fund is worth and how you plan to invest, for example. This should give you a better idea of the best deal for you, rather than just the overhead.
Nonetheless, the relaunch of Interactive Investor is a welcome addition to the repo market, providing stiff competition to AJ Bell, Fidelity and Vanguard. This should also give savers pause. Alongside the launch, consumer research from Interactive Investor found that only 12% of savers are carefully considering pension costs. The others risk digging an unnecessarily large hole in their pension funds.