Vanguard SIPP Review
Looking for an unbiased Vanguard pension review? Wondering if Vanguard pension schemes are a good investment? This article will offer a detailed review of Vanguard pension plans in the UK.
Vanguard offers a low-cost model and large fund selection which makes it fit for long term investors.
In 2020, it launched Vanguard Personal Pension, which is a Self-Invested Personal Pension (SIPP) designed to make saving for retirement easy and less expensive.
In addition, in 2021, it launched a new low-cost retirement advice service for UK investors.
However, somewhere Vanguard lacks in providing a robust trading platform that active traders need.
Let’s understand in detail what exactly Vanguard is, what are the pension plans it offers, if they are good or not, and how much you need to invest in Vanguard pension schemes.
In addition, I will also share some of the customers' experiences using Vanguard pension.
What is Vanguard Personal Pension (SIPP)?
Vanguard is one of the world’s largest investment management companies, offering general investing accounts, low-cost mutual funds, ETFs, stocks, and SIPPs.
They also offer brokerage services, variable and fixed annuities, educational account services, financial planning, asset management, and trust services.
Vanguard began its operation in 1975 and in 2022, their total assets are worth around $7.2 trillion.
Vanguard Pension Plan
Vanguard launched the Vanguard Personal Pension, a Self-Invested Personal Pension (SIPP) in 2020.
The aim of launching SIPP was to cut the cost and complexity of saving for retirement. Vanguard’s SIPP is initially available to those who are accumulating their pension savings. Drawdown capabilities are added for those who want to take payments from their pensions.
At Vanguard, you can choose from a range of over 75 low-cost funds. It includes ready-made portfolios designed specifically for retirement – the Target Retirement funds.
What Are SIPPs?
SIPPs were introduced in 1989. They became highly popular in Great Britain because of the end of lifetime careers and lifetime final salary pensions.
A SIPP is a Self-Invested Personal Pension, which is a tax-efficient investment account that you manage yourself to help save funds for your retirement.
In this account, you add money which is then topped up by the government. In addition, you have the freedom to decide how you want to invest it.
There is a wide range of investments available for you which are approved by the UK’s Her Majesty’s Revenue and Customs. These investments include stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
Here is a diagram which will help you to understand SIPP better. It shows a lifeline starting at age zero and going up to the age of 86. 86 being the average life expectancy in the UK. It shows two phases.
First phase is from the age of zero till 55. This is the phase in which you continue to work and thus, accumulate pension. Second phase starts from the age of 55 till 86. In this phase, you stop working and take out a lump sum from your accumulated pension. Thus, the size of the capital reduces.
Why do you need a SIPP?
Here are the reasons why going for a SIPP is a good idea:
SIPPs give you more control over your pension. You have the freedom to choose how and where your SIPP money is to be invested within the options available.
You get a 25% top up from the government when you invest in a SIPP.
Investing in SIPPs gives you more flexibility in terms of withdrawing an amount from your pension upon turning 55. You can take out up to 25% of your amount as a tax-free lump sum.
It helps you boost your retirement income. You can pay into a workplace pension to increase your own contributions.
It offers a wide range of investment funds and chooses from more than 2,000 funds and ETFs, investment trusts, and shares.
SIPPs accounts accept transfers from other pension schemes, including private and workplace.
SIPPs are passed to a beneficiary or number of beneficiaries free of inheritance cost when you die.
You can save tax on pension contributions whether you are self-employed or employed.
Vanguard pension review: what are the key features of the Vanguard SIPPs?
Here are the key features offered by Vanguard SIPPs:
Vanguard's SIPPs offer a low account fee of just 0.15% a year capped at £375, applied across all accounts in an investor's name on the Vanguard Personal Investor platform. It includes SIPP, ISA, and general account.
You can start investing from just £100 a month or with an initial lump sum of £500.
There are no hidden investing charges.
You can choose a ready-made portfolio or build your own.
The Vanguard Personal Pension offers 77 high-quality, low-cost, diversified funds and exchange traded funds (ETFs). It includes Vanguard's Target Retirement Fund and LifeStrategy ranges.
You can access your pension savings with Vanguard from the minimum pensionable age, which is 55, unless you are suffering from ill health. You can also buy an annuity or transfer to another pension provider to support your retirement needs.
What are the risks with Vanguard SIPPs?
Here are some of the risks involved when you go for Vanguard SIPPs:
1- Penalty on Transfer of Your Pension into Your Vanguard Personal Pension
Any transfer of your pension from another provider to Vanguard Personal Pension may be subject to penalties applied by your current provider. It can reduce the amount of pension that you transfer.
You also need to sell your funds or transfer as cash, which implies that your Vanguard Personal Pension will not be invested in the markets for some time.
In addition, your existing provider may not take the transfer back if you have transferred the amount from your existing provider to Vanguard Personal Pension, however, later decide to cancel it.
2- Access to Pension Benefits
You can access pension benefits only after attaining minimum pensionable age, which is 55-year-old.
In case you take pension benefits earlier, then you may receive less than expected. In addition, if you draw more than 25% of your pension savings, then those withdrawals are subject to tax. Also, you may end up paying a higher rate of tax if you withdraw a large portion of income in a short period.
3- General Investment Risks
Every investment involves some degree of risk. Some of these risks are:
The performance of investment funds cannot be guaranteed.
The value of investments and income from them can fall or rise.
The money you hold in the form of cash in your Vanguard Personal Pension will not benefit from any rises in the stock market.
Inflation affects the real value of your investments.
Vanguard offers low-cost investing. However, fund charges can vary and may increase.
Is Vanguard SIPP the cheapest SIPP in the market?
Almost every investment platform charges a fee if you want to use their services. The industry average charge is nearly 0.35% of assets.
Whereas, Vanguard Personal Pension charges 0.15%, capped at £375 per year.
Moreover, Vanguard does not charge any additional costs, such as exit fees, valuation statements, or transfers. There are no trading charges for switching or selling funds and transferring in or out.
Vanguard SIPP charges only £172 for investing the maximum tax-free annual allowance of £40,000 in a pension.
On the other hand, the average industry standard is £283 and the most expensive platform charges around £400.
Compounding these fees over the years really adds up and reduces your pension savings.
Here is a table showing the amount of pension that would be left after different level of annual fees:
Here is another list that shows different SIPP providers, the amount you invest, and the fee you pay based on the amount of money you invest:
Is Vanguard Personal Pension right for me?
Vanguard SIPPs is right for you when you:
Take your own financial decisions and want to manage your pension online
Want to build your pension fund in a tax efficient way
Want to avail tax relief benefit on your contributions, subject to Government limits
Want to consolidate your previous pension savings into one account
Want your pension to be a long-term investment, which is not accessible before age 55.
Who can open a Vanguard SIPP account?
Any individual of age 18 or above who resides in the UK and pay tax in the UK can apply for a Vanguard SIPP account.
You must also have a UK bank account to make contributions to, or receive benefits from your Vanguard SIPP account. However, any joint named accounts are not permitted.
How to open a Vanguard SIPP account?
You can easily open your Vanguard Personal Pension online.
You also need to confirm your nationality and disclose if you have dual nationality. For such cases, you will be required to provide details of your passport or other form of national identification to verify your nationality.
Who all can pay a contribution into your pension?
Vanguard accepts contributions made to your pension account by another person on your behalf. These can be your relatives. However, they need to be the existing clients of the Vanguard personal investor service.
If you have your own business, then you can also make employer contributions into your pension. However, Vanguard can only accept payments from your employer when:
you are a company director of your company.
Contributions are directly made from the company's bank account of which you are a signatory.
Vanguard does not accept direct debits from business accounts. But you can make one-off payments.
Moreover, Vanguard does not accept any contributions paid by you or someone else on your behalf once you reach the age of 75.
How much can you contribute?
The initial lump sum contribution should be at least £500 and the minimum contribution under a regular savings plan should be £100 per month. However, there is no fixed amount for maximum contribution.
Moreover, all your total contributions to all your pension schemes are subject to the annual allowance. In fact, you can also become eligible to carry forward unused relief from the three previous tax years.
Can you transfer existing pensions to Vanguard?
Yes, you can transfer your existing pension from other UK registered pension schemes to Vanguard SIPP. All these funds will get transferred as cash.
However, Vanguard does not accept any partial transfers of pensions. Vanguard will not accept your transfer if you have already started taking benefits from your pension before 6 April 2006 or your pension is in capped drawdown.
In addition, Vanguard does not accept transfers of safeguarded benefits which are in excess of £30,000.
When a Safeguarded Benefits transfer is requested, Vanguard asks for the appropriate Advice Declaration which must confirm that an authorized financial adviser has confirmed it is in your best interest to make a transfer to Vanguard.
Is your money safe with Vanguard?
Yes, your money is safe with Vanguard! In case Vanguard went out of business, you will be compensated by the Financial Services Compensation Scheme. FSCS cover up to £85,000 of your investments per platform which you can claim online for free.
However, you will not be compensated for investments that are falling in value. Also, you will not be compensated if a company you hold shares in goes bust.
What options do you have for drawing pension income?
You have the following options available for drawing pension income:
Flexible income is also known as drawdown. It is an option which allows you to take regular income after you have taken out a payment of a tax-free lump sum from your pension account. You can adjust the level of income, which will be subject to tax at your marginal rate.
Purchasing a guaranteed income is also known as an annuity. In this option, you are required to exchange a part or all of your Vanguard SIPP for an income payable for either a fixed term or for the rest of your life. Vanguard does not provide annuities. However, it allows you to transfer your Vanguard SIPP to an annuity provider.
There is another option that allows you to combine drawdown and annuity.
Which funds are available if you go for Vanguard SIPP?
Vanguard provides a wide range of mutual funds and exchange traded funds. In each fund, your money is accumulated to purchase a diversified portfolio. The portfolio can include shares, bonds, and other securities based on investors’ fund investment objective and policy. This allows you invest as per your needs.
A lot of funds are aimed to imitate the performance of a particular index of securities, which are called index or tracker funds.
Here are different types of funds available for you with Vanguard:
Open-ended investment companies (OEICs) and unit trusts that are UK-based products regulated by the FCA.
Other options are funds that are domiciled in Ireland which are structured similar to the UK OEICs and ETFs. These funds are regulated by the Central Bank of Ireland and recognised by the FCA for distribution in the UK.
However, Vanguard does not allow direct shares or any investment other than Vanguard funds that you can hold in your Vanguard SIPP.
How high-earners are subject to contribution limits and tax reliefs?
High-earners are those who have taxable income of £240,000 or above.
For high-earners, the Annual Allowance is reduced by £1 for every £2 of taxable income earned over £240,000.
It implies that an investor with an income over £312,000 is subject to a maximum Annual Allowance of £4,000.
What will happen to your Vanguard Personal Pension Account When You Die?
Upon your death, Vanguard asks for the death certificate to proceed with selling all investments held in your Vanguard Personal Pension.
Once they have sold the investments, they place the proceeds in cash while the decisions are made on who will be the nominee.
All the cash remains in your Vanguard SIPP and all the applicable charges continue to be deducted.
However, in case you were investing under a regular savings plan, Vanguard ceased to collect any direct debits and canceled any regular withdrawal facility.
How benefits will be paid after your death depends on whether your death takes place before or after the age of 75.
There are two cases:
The remaining Vanguard SIPP amount is paid out as a tax-free lump sum to your beneficiaries if you die before the age of 75. It can also be given as a tax-free income to your beneficiaries who are 18 years old or above. This option is available upon purchasing an annuity, drawing an income from a new Vanguard SIPP, or by transferring to another pension provider.
Your beneficiaries will be given the same benefits as above if you die after age 75. However, the beneficiaries will be taxed at their marginal rate of tax.
Does Vanguard provide enough educational resources?
Here are educational resources provided by Vanguard:
Vanguard provides a range of educational pamphlets in pdf formats on its website. Other than pamphlets, it also has several educational articles on retirement planning.
Vanguard also provides a retirement calculator that allows investors to determine the monthly income that they will need during retirement.
The website also has screeners that show information about stocks, mutual funds, and ETFs.
The website has basic screeners for stocks, mutual funds, and ETFs.
In addition, Vanguard also has its presence on YouTube, offering educational videos that cover a range of topics, such as retirement planning, and how to buy CD's at the broker.
Vanguard has an active blog and Twitter account that are helpful for potential investors who are looking for investment information at these sites.
Vanguard also offers Personal Advisor Services to those customers who have an account balance of $50,000 or above. It is an advisory service, where users receive personalised investment advice and a financial plan.
How should you choose an investment platform?
Whenever you plan to invest your money on your own without taking help from a financial advisor, it is better to choose an investment platform.
An investment platform allows you to buy or sell your funds, shares, and bonds. It also helps you to manage your investment accounts, including Junior Isas, Stocks and Shares Isas, and self-invested personal pensions.
Here are the parameters that must check to choose the best investment platform:
Consider fees charged by different platforms because high fees can add up to thousands of pounds for a large portfolio.
Generally, fees are charged based on how your investment performs. Therefore, it is better that you compare investment platform fees.
Decide if you want to buy company shares, invest in a wide range of funds, or invest in ready-made portfolios for beginners.
Ask yourself, “why do I want to invest?”. Is it for buying a house, getting married, financing a child’s university fees, or for retirement?
Understand the risks involved while investing and how much risk you are willing to take. See if there are any investments that are risk-free or less risky, such as corporate bonds and government bonds.
Another factor you need to focus on is whether you want to utilise tools that can give you live investment news or provide calculating and tracking functionality.
If you are someone who trades often, then these tools can be a helping hand for you. Otherwise, if you intend to leave your investment for a few years, then you can save on fees by going for a more no-frills platform.
No doubt, Vanguard is on the top in providing low-cost investing due to low expense ratios on index and exchange-traded funds, which makes it fit for buy-and-hold investors and retirement savers. It also offers free educational resources on its website for those who are new to investing.
However, for active traders, other comprehensive trading platforms are better as they find the broker falls short despite its $0 stock trading commission.