Is a SIPP right for you?
Looking for a personal pension? Confused about the plethora of choices on offer and how they really differ from each other?
Unsure whether you need the 'added functionality' of a self-invested personal pension (SIPP), rather than a straightforward personal pension product?
It's hardly surprising.
SIPPs have been around for more than 20 years now, and for much of that time, according to Tom McPhail, head of pensions research at Hargreaves Lansdown, there was "clear blue water between the wide range of investments on offer through a SIPP wrapper, and the restricted range of largely in-house funds available from the personal pensions provided by insurance companies".
There was a marked difference in the pricing of the two types of pension too. "SIPPs were designed specifically for high-net-worth individuals, often businesspeople wanting to hold individual equities and commercial property in their pensions, and they involved lots of fees," McPhail adds.
But the market has changed dramatically in recent years. At the bottom end, insurance companies have been expanding and making their traditional personal pension fund ranges more 'flexible'.
A growing number, including Scottish Widows, Standard Life and Aegon, also now offer their own products badged as SIPPs.
Some comprise a wide range of investment funds (1,000 to 2,000) available via a fund supermarket, supplemented by a few added extras - an external cash account, a sharedealing facility, in some cases a panel of discretionary fund managers who'll run your portfolio for you if required.
Others are muscling in on top-end 'full SIPP' territory: Legal & General bought property-specialist SIPP provider Suffolk Life two years ago, while Standard Life is building up its own property capabilities.
Meanwhile, established SIPP providers such as James Hay and AJ Bell have expanded 'downmarket' to cater for demand from those investors wanting control and flexibility over their own pension portfolios, but not interested in the complexity or high costs of commercial property, structured products, hedge funds or other relatively sophisticated investments.
The result is a broad and complex spectrum of mainstream personal pension products, some labelled as SIPPs and others as personal pensions.
What's right for you?
At James Hay, business development director Richard Mattison argues that only fully comprehensive products merit the SIPP label.
"The term SIPP is not appropriate for low-cost products, because they don't allow access to every type of asset permitted in a pension by HM Revenue & Customs," he explains. But as things currently stand, it may crop up attached to a wide variety of pension products.
So how should pension investors decide what's most appropriate for them? The two central issues are asset choice and cost.
At the top of the spectrum, full-service SIPPs allow investment through assets traded on any recognised stock exchange worldwide, as well as structured products, derivatives, hedge funds and, most significantly, commercial property.
They may also allow more esoteric assets, such as traded endowments and gold bullion.
Commercial property is a popular option for business owners, who are able to buy and hold their own premises very tax efficiently within their pension.
Tax relief on pension contributions helps boost the capital available to purchase the property, and it's also possible to borrow up to 50% of the pension fund value to invest.
Once the property is held within the pension fund, rent is paid to the pension free of tax, and if it is sold within the pension scheme, the proceeds are not liable to capital gains tax.
But full SIPPs come at a price: expect a set-up fee of £300 or £400 and annual charges of around £800, as well as various additional SIPP expenses connected with the purchase and ownership of commercial property.
As Patrick Connolly, head of communications at AWD Chase de Vere, emphasises: "There is little point in paying these extra charges if you are not intending to use the extra functionality."
For competent investors interested in selecting, monitoring and managing their own portfolios but content to stick with relatively mainstream investments, there is a wide range of much cheaper online/phone-based 'fund-based' SIPPs offering a broad choice via a fund supermarket, supplemented in many cases by other investments such as shares.
It's worth finding a provider catering not only for your current investment preferences but also for the possibility that in years to come you might decide to branch out into other investments.
The choice offered within a low-cost pension labelled as a SIPP can vary considerably, so you need to do some homework or take professional advice.
The simpler option
But investors who don't need or want such a vast choice of funds and are not bothered about actively managing their fund portfolio – who basically just want to tuck a regular contribution away into some decent funds each month – may be better off setting up a personal pension from an insurance company offering a more limited range (often known as a hybrid SIPP).
Moreover, there may be potential to increase flexibility in years to come, as some of these personal pension schemes have a SIPP capability involving more choice if you want it.
Charges are the other key consideration, though it can be hard to make direct comparisons. "Personal pension charges have typically been bundled, with a single annual management charge of up to 1.5%, but the components – wrapper, funds, advice – are increasingly being unwrapped and charged separately in the interests of transparency," explains McPhail.
SIPPs don't bundle their charges so it's a matter of adding up any set-up, dealing, administration and underlying fund costs. But for fund-only investors, low-cost SIPP products may work out as cheap or cheaper.
For instance, on SIPPdeal, Hargreaves Lansdown and James Hay's E-SIPP there's currently no set-up or annual wrap charge for fund investors, so the only costs are the annual management charges of the funds themselves (which vary considerably).
You may pay additional annual administration charges if you want to invest in direct equities – for instance, Hargreaves Lansdown charges 0.5% of the value of the share portfolio, capped at £200; but again there's no annual charge from SIPPdeal.
Clearly, at the fund-oriented end of the personal pension spectrum, it's not so easy to make direct comparisons. A specialist IFA will be able to help: many now use low-cost "wrap platforms' such as Transact for their clients, which give access to a full range of funds, shares and exchange traded funds.
"Even with professional advice fees on top, the total costs will usually be lower than the 1.5% personal pension alternative, for much greater flexibility and choice,' concludes Alan Smith, chief executive of Capital Asset Management.
This article was originally published in Money Observer - Moneywise's sister publication - in November 2010
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
Structured products offer returns based on the performance of underlying investments. Many products are linked to a stockmarket index such as the FTSE 100 or a “basket” of shares. There are generally two types of product, one offers income, the other growth and investors have to commit their capital for the prescribed term, usually three or five years. The investment is not guaranteed and if the index or basket of shares does not perform as expected over the term the investor might not get back all their capital.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.
A sophisticated absolute return fund that seeks to make money for its investors regardless of how global markets are performing. To that end, they invest in shares, bonds, currencies and commodities using a raft of investment techniques such as gearing, short selling, derivatives, futures, options and interest rate swaps. Most are based “offshore” and are not regulated by the financial authorities. Although ordinary investors can gain exposure to hedge funds through certain types of investment funds, direct investment is for the wealthy as most funds require potential investors to have liquid assets greater than £150,000m.