A hands-on way to grow your pension pot

The cost of taking out a self-invested personal pension (SIPP) has dropped significantly as competition heats up between providers.

SIPPs are a form of pension plan in which investors may choose from a wide range of investments. Many assets which may not be held in a simple personal pension - such as cash holdings, shares (including those listed on the Alternative Investment Market), non-regulated investment funds and commercial property, as well as a host of more unusual investment vehicles - can be held in a SIPP.

There are now several providers of low-cost SIPPs, meaning that this type of pension is no longer the sole domain of those with very large pension funds.

While SIPPs were once regarded as specialist investment vehicles for those with funds of at least £100,000, they are now being offered to investors with funds of as little as £10,000, and the line between standard personal pensions and SIPPs is becoming increasingly blurred.

Since simplification of the pension rules in April 2006, investing in pensions has become more transparent and straightforward. For instance, the old concurrency rules, which stated that you could not invest in an occupational pension scheme as well as a personal pension, have been scrapped. This means that you may invest your annual allowance of 100% of your income, up to a maximum of £225,000 this year, across as many different pension plans as you wish.

Therefore, even if you already have an occupational scheme and a personal pension plan, you can still start a new SIPP as well, giving you much more freedom over how and when you make pension contributions.

More money, more choice

Different SIPP providers offer different types of investments that you can choose from. The general rule is that the more there is to choose from, the higher the cost of the SIPP. Very low-cost SIPPs, therefore, may only offer an enhanced range of funds, plus stocks and shares on top of what a personal pension would offer, whereas most full SIPPs offer everything.

For example, the Freedom SIPP allows investors to choose from anything approved for SIPP investment, including funds, shares, commercial property, warrants and covered warrants, spread betting, traded options and traded endowment policies (TEPs). However, charges are high. The annual charge is £890 plus VAT, and there is a set-up fee of £390 plus VAT. You will also have to pay additional administration charges for specialist investments on top of this.

At the other end of the spectrum, SIPPdeal charges a one-off fee of £100. It offers access to shares, including AIM shares, investment trusts, and warrants and covered warrants. It also offers access to nearly 2,000 unit trusts and open-ended investment companies (OEICs), but none of the more esoteric investments accessible with a full-blown SIPP.

Similarly, the Hargreaves Lansdown Vantage SIPP, which has no set-up or annual fee but does charge 0.5% for share deals up to a maximum of £200 plus VAT a year, only offers access to cash, shares (including those on AIM), and funds.

Other SIPPs with no set-up or annual charges are offered by James Hay and Alliance Trust, which provides access to over 3,000 shares and investment trusts via its Select SIPP. Interactive Investor also offers a SIPP with no set-up charges but makes a quarterly administration charge of £18.50 on holdings valued at £50,000 and under.

These are just a taste of what is on offer from SIPP providers - and many will allow you to view, research and make investments online. Most do not expect large contributions - for instance, Hargreaves Lansdown will accept monthly contributions to its Vantage SIPP of as little as £50.

Good discounts

If you invest in funds within your SIPP, you will pay the annual management fee on each of the funds you choose, and an initial charge. However, the majority of SIPP providers will be able to offer good discounts on initial charges. "You do not need to contribute large amounts to a SIPP to make it worthwhile," says Tom McPhail, head of pensions research at IFA Hargreaves Lansdown.

In order to decide whether a low-cost SIPP would suit you, as opposed to a full-blown SIPP or indeed a more basic personal pension plan, you need to consider your own risk profile and the investments suitable for that.

In reality, only a small minority of investors will want to put commercial property in their SIPP - for example, a group of barristers might join their SIPPs together to buy their chambers premises. Those who have very large funds and can risk a bit on more unusual investments will probably be able to afford the higher charges of full-blown SIPPs. But many more may wish to deal shares, or be able to hold cash at certain times, which can be done with a low-cost SIPP.

Alan Steel, from IFA Alan Steel Asset Management, based in Linlithgow, West Lothian, says: "The vast majority of people are not going to need access to many of the more esoteric investments and commercial property, so a standard personal pension or low-cost SIPP is adequate. If you are adamant that you want to deal in shares in your pension, then you will need a SIPP."

McPhail agrees: "Investments in cash, funds and share trading is all most people will want to do with their SIPP - that will cover 98% of the market."

Wide range of funds

Even if you only wish to invest in funds, using a SIPP will give you a very wide range. McPhail adds: "Quite often when new funds are launched, they are instantly available for SIPP investments, but not standard personal pensions." By choosing a SIPP, you can also keep your options open to decide later on to branch out to other investments, such as shares, if you wish, he says.

But Steel warns that it is wise not to get carried away with your SIPP, and you should exercise caution with the investment choices you make. "Some people may have unrealistic expectations of performance in a SIPP. Don't forget that it is possible to lose your shirt by buying and selling shares and this is your retirement fund."

If you already have an occupational pension scheme and/or other personal pensions, you do not need to convert them into a SIPP - you can hold a SIPP in addition to these. However, if they are very restrictive in terms of investment, or you are unhappy with performance of the underlying investments, and would rather be able to choose the best funds instead, you can consider transferring your holdings to a SIPP.

Another option, says McPhail, is to consider using a SIPP to top-up contributions to a money purchase occupational scheme rather than an additional voluntary contribution (AVC) fund, which might have more limited investment choices. "As for occupational schemes themselves, you should leave final salary pension schemes where they are, if you have them," advises McPhail.

"But if you have deferred benefits from a money purchase scheme, perhaps with an employer you no longer work for, you could consider transferring those to a SIPP. You must take advice, however."

Similarly, if you have money in a pre-1987 final salary scheme or director's personal pension, you should be very careful about switching. In many cases, these types of fund allow holders to take 50% of the resulting fund as a tax-free lump sum, rather than just 25% as is now the rule. If you switch these funds into a new pension, you will lose this right.

The main benefit of consolidating your other pension holdings into a SIPP is that you have all your holdings on one platform, which is easy to monitor and make changes to, while gaining access to a wide range of investment options at low cost.

It is currently difficult to put protected rights money - the fund you build up from rebated national insurance contributions when you opt out of the state second pension - into a SIPP. However, it is expected that the government will allow protected rights money to be invested in any SIPP from October 2008. The government is currently consulting on this.

Currently, protected rights money may only be invested in a small number of SIPPs offered by insurance companies, and usually at a higher cost.

But while SIPPs are becoming even more flexible and costs are certainly coming down, it's worth stressing that they aren't for everyone. If you don't have the desire to really get involved in running your pension and aren't likely to make the most of the wider range of investment choice, a standard personal or stakeholder pension is likely to be a better, more straightforward option.

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