As I wrote earlier, I have been considering transferring my stakeholder pension to a self-invested personal pension (SIPP).
My basic investing philosophy at the moment is to put all my equity investments in index tracking funds, so currently I have a stakeholder pension invested entirely in a fund tracking the FTSE All Share index. The whole thing has a management charge of 1%, in common with most stakeholder pensions. The minimum regular payment is £1 per month and the minimum lump sum investment is £100.
The SIPP I am considering switching to is offered by Hargreaves Landsdown. Here I would invest in a different fund tracking the FTSE All Share index. This fund has a management charge of 0.25%, the SIPP itself has no fees associated with it and is touted by money saving expert as the cheapest SIPP on the market (unsurprisingly, as its basically free). The minimum regular payment is £50 per month and the minimum lump sum investment is £1000.
After a little discussion and thought, I decided that there wasn’t a good reason to stick with my stakeholder pension so I sent off for the application form. However, on reading the small print, it would appear that to transfer my stakeholder pension into the new SIPP it needs to have a balance of £5,000. I estimate that it currently has a balance of £3,800.
This leaves me with two choices.
- Continue paying into stakeholder and transfer when it reaches a balance of £5,000
- Start the new SIPP, leave the stakeholder where it is and transfer when the stakeholder grows to £5000
To decide which is the better option I got out my trusty spreadsheet tool and did some calculations. I know the amount that I am able to contribute each month to a pension so I used that together with an annual rate of return to calculate which would give me the better result. I assumed that the rate of return would be constant for simplicity and used the following formula to (iteratively) estimate the monthly balance of the pensions.
=(prev month balance + payment)*(1+growth)^(1/12)*(1-charge)^(1/12)
This showed that initially, I would be better off if I started the SIPP straight away. However, continuing with the stakeholder and switching once it reaches £5,000 would make me better off within a couple of months of reaching £5,000 and the difference increased as time went on.
I tried varying the rate of return rate and found that if I set the rate of return higher, there was less of a difference, but with a negative rate of return, the difference was exacerbated (and obviously it would take forever to get enough in the stakeholder to tranfer it).
Taking a leaf out of JLP’s blog to act on the maths, I’ve decided to stick with the stakeholder pension until it reaches £5,000 and then switch. Fortunately if the stock market grows overall, that should take me less than a year and even if there is a net decline, I’ll still be over the £5,000 barrier within two years.