Are SIPPs the way to take control of your pension?

2009 may have been a rollercoaster one for the equity markets, but that has not stemmed the swelling tide of investors opening new self-invested personal pension (SIPP) accounts.

AJ Bell, one of the biggest providers in this market, saw a 24% rise in the number of SIPP accounts administered last year, while the value of SIPP assets on its books grew 40%, helped by the market recovery over the past 12 months.

It's not hard to see the attraction: SIPPs offer control, flexibility and investment freedom to anyone prepared to do the basic legwork involved.

What are SIPPS?

You (or your financial adviser) are in the driving seat, choosing from a wide choice of funds and other assets, monitoring their progress and switching between investments as you see fit.

SIPPs were introduced more than 20 years ago, but for many years only wealthy, sophisticated investors could afford to use them because of their high minimum entry levels and steep charges.

But the rise of online investment sites and online fund supermarkets has transformed the SIPP market. A new generation of simple, low-cost online products has made SIPPs more accessible.

Broker Hargreaves Lansdown has seen its SIPP business explode from just £100 million to almost £3 billion in the five years to June 2009.

"The SIPP market has changed markedly over the last three or four years, and the bulk of marketing and advertising has been focused on developing SIPP business at the expense of other types of pensions," says Tom McPhail, head of pensions research at Hargreaves Lansdown.
What are the rules on SIPP investment?

SIPPs are governed by the same tax and contribution rules as other pensions – for any contributions you make to your pension fund (even if you're not a taxpayer), the government automatically adds a further 20%, equivalent to basic-rate tax, while higher-rate taxpayers can reclaim another 20% through their self-assessment forms.

Since April 2006, pension investors are allowed to pay up to 100% of the value of their gross earnings into their pension plans (including SIPPs) each year, up to a maximum of £245,000 for the 2009/10 tax year.

But high earners should watch out: changes outlined in the last budget and November's pre-Budget report mean people with an income of more than £130,000 this tax year may lose higher-rate tax relief on contributions if they pay in more than £20,000 a year.

Although SIPPs get the same tax treatment as any other kind of pension, they provide much greater choice in the way you eventually take your retirement income.

In particular, a SIPP makes it easy to defer buying an annuity (until as late as 75), as you can leave your pension invested and simply draw down an income from it.

What are my options?

However, not all SIPPs are the same; there can be quite major differences in the range of asset types available.

The new breed of cheap and simple online/phone-based SIPPs are geared towards mainstream investors prepared to make their own decisions.

The simplest, such as those from IFA Bestinvest or Fidelity, focus on a broad range of funds through a fund supermarket, with cash as a temporary alternative, while SIPP provider James Hay allows both funds and shares in its SIPP.

However, some products provide a considerably wider choice. For example, Selftrade's SIPP allows UK and international shares, gilts (government bonds), corporate bonds and exchange-traded funds, as well as a range of investment funds.

At the other end of the spectrum are the old-fashioned, full-service SIPPs, though as McPhail observes, "only a tiny percentage of the population would want or need one of these".

Full SIPPs allow you to invest for your retirement through assets traded on any recognised stock exchange worldwide, as well as structured products, derivatives and hedge funds.

They may also allow more offbeat permissible assets, such as traded endowments, gold bullion and commercial property, or even – in one or two cases – unlisted private equity.

Different investment managers may be brought in to manage different portfolios within the single pension pot. But few providers accept the full range of permitted investments, so it's important to check if you want to hold more unusual assets.

How much will it cost?

Many online SIPPs are now very cheap. Several, including those from Hargreaves Lansdown, James Hay and AJ Bell, have no set-up fees or annual administration charges; all you're likely to pay are the costs for online sharedealing or discounted funds.

By contrast, comprehensive SIPPs come at a hefty premium - expect a set-up fee of around £300 to £400 and annual charges of up to £800, plus substantial extra costs for specialist investments such as commercial property.

Moneywise Pension Award comprehensive SIPP winner, Hornbuckle Mitchell, for example, offers a wide range of investment options, including commercial property, but charges set-up fees of up to £345 and administration fees of up to £490 a year, and a property purchase for your SIPP will cost £600 to set up. 

Are they for me?

The fact that there's now a good choice of low-cost SIPPs online means they are available to most people. "Even with just £100 a month or so you can set up a SIPP account, choose a couple of funds and manage the whole thing online very easily," says McPhail.

Billy Mackay, marketing director for AJ Bell, agrees: "It's simply not the case any more that SIPPs are the more expensive choice."

Nonetheless, if funds are all you want, you may be better off with a personal pension or even a stakeholder (where the choice is more limited and the fee is capped).

Daniel Clayden, director of IFA Clayden Associates, points out that many providers have turned their personal pension products into 'hybrid SIPPs' – adding investment choice and flexibility by offering a wide range of external as well as internal funds.

"The norm now is to have a single pension provider, but not to put all your money into its in-house funds," he says. 

If you have a personal pension, unlike a SIPP, you generally only pay a single-plan charge rather than paying for the purchase of each individual holding.

While this might make it difficult to know exactly what you're paying for, they could be the preferred option if you're not interested in holding direct equities or other more unusual investments.

McPhail believes that the choice of whether or not to choose a SIPP is not really about cost or how much money you have to invest, but more about 'financial engagement' – how interested you are in your investments.

"If you don't want to think about where your money is going, you're probably better off choosing a simple stakeholder pension, which will give you a limited choice of funds to choose from and charge a regular fee," he adds.

Questions to ask you

  • Do you prefer the idea of a core 'plain vanilla' pension fund to hold for the long term and feel reluctant to mess around with more high-risk or unusual funds? If so, a stakeholder product is likely to suit you better.
  • How do you feel about selecting your own SIPP funds? If you don't like that idea, consider either using a financial adviser or sticking with the more limited investment choice of a stakeholder.
  • Are you likely to check up on your portfolio performance regularly? If not, the SIPP route is probably not for you. 
  • How many existing pensions do you have? If you own several policies it may well make sense to pull them together within a single SIPP wrapper.

What steps do I need to take?

If you're happy to run your own SIPP, it's pretty simple to start off. First, decide what kind of investments you'll want to hold in your pension.

Try and think ahead – even if you only feel comfortable with investment funds at present, there may come a day when you have more time to build a portfolio of individual shares or want to branch out into investment trusts. Also look at the charges on the SIPP you're considering.

Once you've filled in the online forms and set up your account, it's not difficult to source a steady email flow of up-to-date investment ideas and information from firms such as Dennehy Weller or Whitechurch Securities.

Another possibility is to pay a one-off fee to a fee-based independent adviser for some fund or other investment recommendations to start you off.

Alternatively, if you like the range of investments available through low-cost SIPPs but don't have the time, interest or confidence to make your own investment decisions or monitor your portfolio, you could contact a specialist financial adviser.

AJ Bell's SIPPCentre for IFAs, which has won the Moneywise Pension Awards low-cost SIPP gong for the past five years, is a good example.

It includes a broad range of investments (including commercial property) and the option of a discretionary fund manager for the fund portfolio. The set-up fee is £120, with a quarterly administration fee of up to £45 plus VAT.

How can I build a portfolio?

If you're looking for ideas to shape your portfolio, bear in mind how long you have to invest: basically, the younger you are, the more risk you can afford to take.

Adrian Lowcock, senior investment adviser for IFA firm Bestinvest, suggests a moderate-risk portfolio will suit many people in their 30s and 40s. This will include commodities, emerging markets and Asia Pacific funds, alongside commercial property and a strategic bond fund.

As you move through your 50s and into your 60s, he recommends increasing exposure to more cautiously managed bond funds and to commercial property and absolute return funds.

"As you approach retirement, risk should be taken off the table as it's now harder to replace what we lose," Lowcock adds.

Can I transfer my pension into a SIPP?

There are good reasons to consolidate other bits and pieces of pensions within a single SIPP wrapper. It's cheaper and easier to manage – and most importantly, you can see at a glance how your whole pension portfolio is performing.

It's very difficult to manage your investments efficiently when they're scattered among several different providers, each with its own menu of funds. However, Tom McPhail, head of pension research at Hargreaves Lansdown, offers two words of warning:

  • Don't give up an existing pension if it will mean losing contributions from your employer.
  • Think carefully before transferring if you will be hit by hefty penalties for closing your existing pensions.

Otherwise, it's sensible and straightforward to bring your whole pension pot together under one roof. Simply contact your SIPP provider – you will need to do this in writing – and instruct it to arrange the transfer into your SIPP account.

The provider will need the name and address of each existing pension provider, plus your contract reference number in each case. It will then contact the existing providers on your behalf and request the transfer. The whole process should take a few weeks, but no longer.

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