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A taste of SIPPs By Sam Barrett
Once the preferred pension vehicle of the very wealthy, self-invested personal pensions (SIPPs) are now appealing to a much broader range of investors. "They've become much more cost-effective in the last couple of years," Put simply, SIPPs are just another form of personal pension, with contributions qualifying for tax relief and any investment growth tax-free. Where they differ though is on the investment choice. Unlike a stakeholder or personal pension where you are offered a range of funds, with SIPPs you can invest in anything, including funds, shares, futures and options, and hedge funds. This makes them particularly useful if you are considering taking your retirement income through an unsecured pension as your fund will still be invested. SIPPs can also be used to invest in commercial property. When this happens the property can be leased, even to yourself, with the rent being paid into your SIPP. You can even borrow to help finance the purchase of a commercial property for your SIPP, although the maximum advance is capped at 50% of the value of your fund. But not every SIPP provider will offer the full range of investments. "SIPP providers decide what investments they're happy to deal with," explains Matt Ward, head of pensions and wealth management at research company Defaqto.
Minimum investments tend to be higher than on stakeholder and personal pensions. Again this will vary, but - as an example - Standard Life requires a minimum lump sum of £10,000 or a monthly premium of £300. How SIPPs work SIPPs operate in a similar way to other dealing accounts. "They can be as easy to manage as an ISA," says Rebecca O'Keefe, head of fund manager relations at Interactive Investor. "A SIPP is just a different type of tax-wrapper for your investments." This means that you can switch your investments around whenever you like, even pulling out of the stockmarket and sitting in cash if things start to look ugly. The tax treatment does mean there is a slight difference, though. "The Revenue credits your SIPP with the tax relief between six and 11 weeks after you make the contribution," explains O'Keefe. "We would email you as soon as it's received, and it will sit in cash until you decide where you'd like it to be invested." The price of flexibility The charges on SIPPs are an important consideration. Rather than having a flat charge of 1.5% or less, there are several charges to look at when comparing SIPPs. First, there's a set-up charge. Charges ranging from nothing on plans from some providers (including Interactive Investor and James Hay) to £600 or more on other plans, especially those that permit more unusual investments, such as commercial property. You will also incur an annual administration fee. Defaqto puts the average at £416, but this varies from nothing with Alliance Trust, Hargreaves Lansdown and Sippdeal SIPPs through to more than £800 on some of the more specialist products. And while some will increase the fee as your portfolio grows, E*Trade waives it when your fund is worth more than £100,000. Others vary charges depending on where your money is invested. For example, on the Fidelity FundsNetwork SIPP, the annual charge is £250 if you invest in its funds but £400 if you want to include other investments such as commercial property. On top of the plan fees, there are also charges relating to the underlying investments. The emergence of SIPPs connected to fund supermarkets has helped to bring charges down on the fund side too. Hefty discounts on fund charges are also on offer with other fund supermarket-connected SIPPs providers, including Hargreaves Lansdown, which will discount up to 5.5%, and Interactive Investor, where the average initial charge is less than 1%. Whatever the discount on the initial charge, most will still levy the annual management charge, which is usually between 1% and 1.5%. Dealing charges for shares and other non-fund investments tend to be broadly in line with the charges levied outside of the SIPPs wrapper. To make investing your SIPP in shares more economical, some SIPPs, including those from Halifax and Interactive Investor, offer regular investment plans with greatly reduced dealing charges. Rebecca O'Keefe explains: "Our standard share dealing charge is £10, but if you intend to invest on a monthly basis you can set up a regular investment plan, where the cost of buying shares will fall to £1.50." If you opt for a regular investment scheme, the dealing charge and stamp duty are taken out of your investment and you will only be able to buy full shares. "On our Sharebuilder plan it's possible to hold fractions of shares, but the HM Revenue & Customs said this wasn't possible for SIPPs, so any remaining investment will be held as cash in your account," adds Simon Longfellow. Is a SIPP right for me? Although having access to such a diversified range of investments may seem attractive, SIPPs aren't right for everyone. "Ask yourself whether you need all the flexibility," says Justin Modray. "If you only want to invest in a range of funds then some of the stakeholder and personal pensions can be a cheaper option. Many now offer a wide range of external links, so there's plenty of investment choice." The flat charging structure also means a SIPP won't necessarily be right for you. If you only have a small pension fund they can be much more expensive than standard personal pensions. If, however, you have a large fund, these charges can make them very cost-effective. A large fund is also sensible to build up sufficient diversification within your SIPP. Picking your SIPP Once you are happy that a SIPP is the right form of pension for you, then it comes down to deciding how much investment flexibility you require. "Think about where you want to invest your pension," says Alistair Hardie. "They don't all permit the same forms of investments, so make sure the one you pick offers you access to what you want." The next key thing to consider is the charges. Think about how much dealing you're likely to do and how large your fund will be. As a result of pension simplification rules, you can easily switch to a more appropriate or better value SIPP if necessary, or run two SIPPs alongside each other. But, the downside of either of these strategies is the additional charges you would incur in terms of a new set-up charge or additional annual charges, respectively. When deciding which SIPP is right for you, also consider how you want to manage your SIPP. Most providers allow some form of online valuation, but if you're planning to switch your portfolio on a regular basis, then make sure your SIPP provider offers a convenient (preferably online) means of doing this.
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