I know many busy people who treat pensions as one more irritating task to avoid. The guilt and fear around saving are often obvious. Just thinking about setting money aside for retirement can feel like an overwhelming burden that threatens to unravel whatever financial stability they have.
Behavioural economist Shlomo Benartzi offers an explanation for this tendency. His Save More Tomorrow programme proposes ways to make saving less painful by phasing in higher contributions over time. That behavioural approach can help people ease into long-term saving without feeling constantly deprived.
Save More Tomorrow is not widely adopted in the UK, so it’s worth looking at practical alternatives that work in our market. Rather than waiting until age 65 and placing a bet on a long shot, it makes sense to find a simple, low-cost pension that suits modest savers and helps compound returns over decades.
Following reader suggestions and inexpensive investing research, I set out to identify the cheapest viable pension for someone on a tight budget. The priority is a flexible, low-cost vehicle that accepts small contributions and provides access to low-cost index funds and enough choice to build a diversified portfolio.
Important: If your employer offers a matching contribution in a company pension scheme, sign up immediately. Employer matching is effectively free money and refusing it reduces your take-home pay in retirement.
Dirt cheap SIPP
For a DIY pension, the right solution is an affordable Self-Invested Personal Pension (SIPP) that charges low platform fees, lists low-cost index funds, and offers enough fund choice to create a simple diversified portfolio.
Key features to look for in the cheapest pension options:
- Low platform fees — percentage or flat fees can make a big difference over time.
- Access to low-cost index funds so fund Total Expense Ratios (TERs) remain minimal.
- Sufficient fund choice to allow a basic diversified allocation across global equity and government bond trackers.
Two platforms commonly cited for cost-conscious investors are the Best Invest Select SIPP for smaller balances and the Interactive Investor SIPP for larger balances. Best Invest is attractive for balances under a specific threshold because it charges a low percentage platform fee, while Interactive Investor’s fixed-fee structure can be cheaper once your assets exceed that threshold.
Typical advantages of a low-cost SIPP platform include no setup fee, no dealing fee for many OEIC/unit trust funds, a competitive annual platform charge, and no switching fee. These factors help small savers avoid the high fixed charges that can erode returns.
Mind your fees and questions
Platform charges matter a lot for smaller balances. A percentage-based fee that looks low in relative terms can still eat into small pots more than a modest flat fee would. For example, a 0.3% annual platform charge on £10,000 costs £30 per year, while a flat quarterly or annual platform fee might look larger in absolute terms but become comparatively cheaper as your pot grows.
Conversely, percentage fees become a larger absolute cost as your pension grows. If a platform charges 0.3% of assets, that can be expensive at higher balances. A flat-fee platform can be more cost-effective once your pot passes a certain level. Consider switching providers when the balance and your trading habits make a different fee structure advantageous.
Once your SIPP is set up, choose a low-cost index fund portfolio from the available fund list. Simple, diversified models — combining a global equities index fund with a government bond/gilt fund and perhaps a domestic equities tracker — are easy to maintain and minimise fees. Keep the focus on low TER funds so most of the fees you pay are the unavoidable fund costs rather than excessive platform charges.
The bare minimum
Some low-cost SIPPs have minimum contribution or initial investment requirements. For example, certain platforms may require a lump sum to open the SIPP and minimum amounts per fund. These minimums can be a barrier if you cannot raise the initial amount, but they don’t mean small savers are excluded over the long term.
If the upfront minimums are too steep, consider a low-cost stakeholder pension or another entry-level product that accepts very small monthly contributions. If you can meet an initial lump sum, you can then top up in smaller, manageable increments — buying into a chosen fund when you have enough to meet the platform’s minimum order size, perhaps quarterly or whenever you can afford it.
A practical approach is to start with a broad world or international equity index fund from a reputable provider and then add a gilt or bond index fund to introduce diversification. Over time, add other cheap trackers such as a domestic large-cap index or small tilt if you wish, but avoid expensive exotic holdings that push up overall costs.
For savers on a tight budget, the goal is to keep investment choices simple and focus on minimising fees. That often means avoiding regular active trading, individual share selection, or niche assets that attract higher dealing and custody charges.
Ready, aim, retire!
In short: if money is tight now but you want a different financial reality in retirement, choose the cheapest sensible pension you can, start contributing, and let compound interest work in your favour. Keep costs low, hold a basic low-cost index fund allocation, and increase contributions gradually as your situation allows.
Take it steady,
The Accumulator
Note: This article was updated with new information on cheap DIY pensions in September 2014. Some reader comments may refer to earlier versions of the piece.