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LONDON -- Popping into the village pub the other night, I had the first of what I suspect will be several similar conversations over the coming days and weeks.

The news that hidden charges can eat up half your pension savings has gone viral, propelled by prominent stories in the Daily Telegraph and on the BBC news.

You shouldn't have been surprised, of course. Here at The Motley Fool, we've been saying the same thing for years. And now, it seems, politicians and the mainstream press have got the message, too.

No magic wand
But understanding the problem, and knowing what to do about it, are two separate things. What's more, the sort of solutions so far trotted out -- legislation, codes of practice, and the like -- can't and won't be introduced overnight, if at all.

But for many of us, there's a simpler solution to the problem of high and hidden charges: Just don't pay them.

Roll your own
Workplace pensions -- particularly gold-plated final salary schemes -- are fast becoming a thing of the past.

And as hundreds of thousands of workers in the public sector are discovering, cozy assumptions made a few years ago are fast being torn up by public sector employers and the government. The message: work longer, and retire on less.

Which, for private sector employees, has been the case for some time. And, what's more, is a trend that is more than just rhetoric pumped out by the usual suspects with vested interests. As I wrote a while back, it's a development that's genuinely showing up in demographic statistics.

The result? Huge numbers of people are coming to the conclusion that to retire in comfort, they'll need to make their own provision for retirement savings.

I'm not, at this point, going to debate the "ISA versus SIPP" issue. Each has their merits; choose the solution appropriate for you own circumstances.


  • A low-cost stocks and shares ISA offers tax relief on income, and provides ready access to your money should you need it prior to retirement. There's no obligation, either, to buy an annuity.
  • A low-cost SIPP, on the other hand, offers tax relief on contributions, currently at your highest marginal rate -- which is especially attractive if you're a higher-rate taxpayer now, but likely to be a basic rate taxpayer in retirement.

What's more important is what you put inside those pension wrappers, after first ensuring that the wrappers themselves are as cost-effective as you can make them.

The low-cost heart
Talk to IFAs who charge for their advice, rather than allow it to be colored by the commission earned on the products that they "recommend," and there's an undoubted move to low-cost trackers at the heart of a portfolio.

Helpfully, this is a strategy that can significantly cut hidden charges. By all means chase after exotica with high-charging funds targeted on particular investment theses, but anchor your portfolio on a bedrock of low-charging passive products.

Which in essence, means index trackers. Now, low-cost trackers from Vanguard and HSBC in the form of conventional FTSE 100 and FTSE All-Share index tracking funds have long been popular. But these days, exchange-traded funds -- in effect, index-tracking shares -- are another, more flexible, low-cost alternative.

And those same two low-cost providers -- HSBC and Vanguard -- have some tasty ETFs on offer.

Five picks
Here, for instance, are five ETFs that could form the heart of any sensible low-cost retirement portfolio.

You wouldn't necessarily want to be 100% invested in them in the immediate run-up to retirement, but for investors with a 10-year horizon, I reckon they're difficult to beat.

In each case, I've listed the name, ticker and total expense ratio, which, as you can see, is eye-wateringly low. No massive hidden charges here, then!



Vanguard FTSE 100 ETF (LSE: VUKE.L  ) 0.10%
HSBC FTSE 250 ETF (LSE: HMCX.L  ) 0.35%
Vanguard S&P 500 ETF (LSE: VUSA.L  ) 0.25%

Shares, too
Of course, buying shares directly -- if your pension pot is big enough to spread the risks sensibly -- is the lowest-cost strategy of all.

And again, it's not difficult to pick out "bedrock" shares that should do the business over the long term. Tesco, SSE, GlaxoSmithKline, Royal Dutch Shell, British Land, Unilever -- such popular picks power countless portfolios.

They're not going to shoot the lights out -- but they do stand every chance of delivering decent returns over the long run.

And several of those shares, as it happens, are companies that appear in a special free report from The Motley Fool -- "Top Sectors Of 2012" -- and which also power my own pension portfolio, although in some cases I bought the shares some years ago. But in the last couple of months, I've bought into two further companies, directly informed by reading the report. Which, as I've said, is free, and can be in your inbox in seconds.

New to buying shares, and not sure how best to go about it? Then grab yourself a copy of this free special report: "What Every New Investor Needs To Know". Not only will it get you up to speed with the basics, it will also show you how 100 pounds invested in a basket of shares at the end of 1945 would have grown into a pension pot worth 136,107 pounds by the end of 2010. Without adding another penny.

The return from cash over the same period? A mere 6,163 pounds. I know which outcome I prefer. Once again, the report is free, and can be in your inbox in seconds.

Are you looking to profit from this uncertain economy? "10 Steps To Making A Million In The Market" is the very latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- it's free.

More investing ideas from Malcolm Wheatley

Malcolm holds index trackers from Vanguard and HSBC, and holds shares in Tesco, SSE, GlaxoSmithKline, and Unilever. He does not have an interest in any others shares mentioned. The Motley Fool owns shares of Tesco. The Motley Fool has a disclosure policy.
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