Question No. 8

"How Do I Set Up My Own
DIY Pension Fund?"

Our Response

How do DIY Pensions work?

Think of a DIY Pension as basically a basket in which you can put your chosen investments and, protect them from the taxman. 

If a basic rate taxpayer (who currently pays 20%) invests £100, it only costs £80 (higher rate taxpayers, who currently pay 40% tax, would only pay £60).  The government contributes that extra £20 and £40.  That's one of the big advantages of a Pension.

In a word.  Tax.

DIY Pensions can (and should) be completely managed online.  Investing by telephone or through the post is still done, but it's archaic to invest this way and do check on costs.

DIY Pensions can be started with nothing, with a lump sum, or you can transfer an existing pension.

There are two ways you can contribute to your DIY Pension:

• Periodic contribution - lump sums and/or a monthly contribution
• transfer another pension - if you already have a pension plan or more than one, you can consolidate them all into one

And there are two types of DIY Pension:

• a low cost SIPP - you are in complete control and responsible for all decisions.  This is also called an execution only Pension Plan.
• a full SIPP - if you require advice

Our website is written around the first type.

You are limited to what you can put into a DIY Pension.  Below is a list of what you can invest in:

• Shares
• ETFs
• Unit trusts and OEICs
• Investment Trusts
• Gilts and corporate bonds
• Cash
• Commercial property

Here's what you can't put into your DIY Pension:

• Residential property
  

How much can you invest into your DIY Pension?

There are limits to how much you can invest in a DIY Pension and still get tax relief:

If you are a wage earner:

• 100% of your annual earnings before tax - up to a limit of £40,000/year.

If you are a non-wage earner:

• you can invest up to £3,600 per tax year and still get basic rate tax relief i.e. £2,800 per tax year to which the taxman adds £720.

In addition to annual allowance there is also what is known as your  'growth time allowance'.  This is the amount of money you can save, tax-free, into your Pension Plan during your lifetime - this is currently £1m.

If you have any more than that - congratulations.  What a nice problem to have :)

So, what will it cost you to start and run a DIY Pension? There are numerous costs involved, and these will vary from provider to provider.  You'll need to consider what investments you'll hold.

For example, there may be:

• a set-up fee:  this can be as much as £500
• annual payment fee:  some DIY Pension providers charge nothing for this, but it could be as much as £1000
• dealing charges:  each time you buy and sell you will incur a fee.  On average, this should be no more than £12.50 per trade (can be less if you trade more frequently).
• exit/transfer fees:  if you are moving money into a DIY Pension from another Pension Plan, this can cost as much as £50.
• Pension drawdown charges:  drawdown charges can be anything from £300 for the initial set-up to £150 per year.

For large portfolios, all these charges can go into £1000s.  You must do your own due diligence and consider any, and all, the fees that you may be liable for.

Not all providers charge the above fees.  A lot of services are free.  Again, you need to check.

So, who's the best provider for your DIY Pension?

It's not easy to decide.  Best to take a look at all the options.  There are pluses and minuses.  Make a table like the one below and do your own "Bonus Malus"

AJ Bell YouInvest

Alliance Trust Savings

Best Invest

Charles Stanley Direct

Fidelity Personal Investor

Halifax Share Dealing

Hargreaves Lansdown

International Investor

iWeb

Selftrade

The Share Centre

Willis Owen

Conclusion

Selecting a Pension provider is a relatively easy job.

But you must do your due diligence in deciding which one to go for.

It shouldn't take you long.

Consider carefully ALL the costs.  Remember, one of the main reasons to start a DIY Pension is because of low fees.  So choose well.

Once you've decided, it's a simple matter of contacting them and they will do the rest. 

Then, you are all ready to go.

Footnote

As a newbie, you may want to read the other "Frequently Asked Questions" on this website.  Doing so, will give you a good introduction to running your own DIY Pension.

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