Combining all that is best in ISAs and SIPPs

We may sometimes feel that society’s burgeoning dilemmas, such as the need to address potentially serious financial problems affecting large numbers of people, are unique. In truth, however, very few are so rare that they haven’t been tackled before. Furthermore, solving them over a drink is also a tried-and-tested method of getting a result.

Take, for example, Alexander Webster and Robert Wallace, two Church of Scotland ministers, who, in the mid-eighteenth century devised the world’s first pension plan, effectively a life insurance scheme designed to benefit widows of their fellow clergy.

The pair were drinking buddies, having met after Wallace founded a ‘debating society’; according to contemporary accounts, ‘debating’ was a very loose euphemism for drinking. However, it seems unlikely that the duo overdid the drinking after they discovered their respective passion for maths while seeking to resolve a long-standing problem.

Webster and Wallace were acutely aware of a quandary that had existed for two centuries. In 1560, after the Church of Scotland allowed its ministers to marry, it became responsible for the fate of ministers’ families, who could be left destitute on the death of the family breadwinner.

More than a century later, the Scottish Parliament passed a law which required church parishes to provide the families of deceased ministers a one-time payment. Webster and Wallace knew that these payments were often insufficient to meet the family’s needs; they also placed enormous strain on the finances of individual parishes.

Using data produced by Sir Edmund Halley (he of comet fame), the pair calculated that should a minister contribute the equivalent of £2.61 a year to their newly-created pension fund / insurance scheme, his widow would, upon her husband’s death, receive an annual pension of £10, more than enough to keep her and her children free from the clutches of the poorhouse.

The Scottish duo enjoyed another spell in the spotlight after What They Do With Your Money was published in 2016. The book suggests that this inaugural pension fund was enormously popular because its approach to managing members’ contributions was “both technically and morally trustworthy.”

Perhaps all funds should be administered by men and women of the cloth, but until they are, WTDWYM alerted investors to the cost of having their savings managed, a topic this column touched upon a fortnight ago.

If keeping costs to an absolute minimum is a prerequisite for squeezing every last drop out of your pension fund, avoiding onerous conditions is another.

Following the introduction of George Osborne’s ‘pension freedoms’ Self-Invested Personal Pensions (SIPPs) have become enormously popular with people who appreciate their flexibility and efficient tax structure. Meanwhile, as the annual ISA allowance has also risen, couples can effectively save up to £40,000 a year into them, the proceeds from which remain tax-free.

I’m a fervent advocate of combining all that is best in ISAs and SIPPs. The primary aim of each is to help build a substantial as possible pension pot, not to see them used by a fund manager as a form of client ATM.

Of course, investment managers need to charge fees, but it’s not asking much for them to be fair and transparent.

When most of us can compare a raft of management charges online in a few minutes, there seems little point in less scrupulous firms trying to disguise fees and other charges and lumping them onto the client; it’s tantamount to sharp practice and only annoys people.

When selecting an investment manager, you should choose one that is completely up-front with their charges in order that you have no unpleasant surprises when you receive your quarterly investment statement. Costs can remain at affordable levels if matters are kept simple; the decent investment manager will achieve this by utilising up-to-date technology to enhance efficiency.

When Webster and Wallace created the world’s first pension plan, such was the degree of its transparency and simplicity that the pair calculated that within 20 years the fund would be worth £58,348; they were wrong – it was £58,347, an acceptable rounding error of 5p a year. The pair were remarkably accurate because, amongst other factors, they knew how much their fund would cost to administer.

Decent investment managers operate in similar tradition, keeping costs low to ensure the value of its clients’ pension pots are not undermined by the regular application of often questionable fees and charges. ‘Technically and morally trustworthy’ would be a good way to describe it.

TAM Asset Management Ltd offer investors the opportunity to invest in a variety of mainstream and ethical portfolios. For further details, please visit the MoneyMapp website: www.Moneymapp.com