Your Money: A pension that is tailored to your own needs

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WHAT IS the difference between a suit made by a Savile Row tailor and one bought off-the-peg? Well, in theory the more you pay the better it should fit. Providers of self-invested personal pensions (Sipps) argue the same for their products in comparison to mainstream plans.

Sipps can cost more than retail plans from insurance companies, but allow a far wider choice of investments to be made. Glossy marketing literature typically says Sipps are most appropriate for the "sophisticated investor". There are now over 12,500 in force, with assets under management of around pounds 4bn.

Not so long ago, "taking out a pension" meant simply investing premiums into a with-profits fund run by an insurance company. Similar in composition to funds run for endowment savings plans, these pooled funds invest in blue chip shares, gilts and property. But after adjusting for inflation, returns on these funds can lag behind those available, which offer more direct exposure to the stock market. The range of permitted investments now includes not only UK collective funds, but commercial property and foreign currency hedge funds.

"The majority of Sipp holders choose discretionary managed equity portfolios run by us on the same lines as an ordinary share portfolio," explains Tom Schwartz of Capel Cure Myers, a fund manager which provides a Sipp management service. "A Sipp owner can treat his pensions fund as part of his whole investment portfolio and make far easier decisions about asset allocation."

It is vital to remember that regardless of the range of permitted investments, Sipp providers may restrict the range of what can be bought via the plan they provide.

The legal structure of Sipps helps explain the charges made for setting up and running them. To satisfy Inland Revenue rules, there must be separate plan providers, administrators and trustees. The provider may be little more than a marketing company. The administrator runs the plan, keeping transaction records on matters such as the purchase and disposal of investments. Finally, the trustee acts on behalf of the plan owner. While the owner of a Sipp has ultimate control over investments held in it, some providers insist that the services of an authorised investment manager be employed in particular investment decisions. Winterthur Life, the largest Sipp provider in the UK, asks for this in relation to any investments that are made, other than those in insurance company pension funds.

Comparing charges on Sipps with those of retail plans is difficult because Sipps are non-standard products. The key difference is that most Sipps charge flat-rate fees, while retail plans take a percentage both of the premiums paid in and of the fund's value. But this does not equate charges with fund performance. Because each Sipp has a unique investment content, no performance tables are available.

A large part of Sipp business comes from the transfer of existing pension funds. "Sipps are ideal for income drawdown, rather than just buying a pension annuity," argues Mr Schwartz. "Income drawdown allows a pension fund to stay invested while paying a pension income."

Some providers offer "deferred" Sipps, or hybrid plans. Deferred Sipps are conventional plans with a contractual option to convert to Sipp status at a later date. Hybrid plans allow mix-and-match combinations of funds managed by the provider with those more freely available. However, Mr Morrison is not sure these options are worth paying for: "All personal pensions are potential Sipps, as accumulated fund values can be transferred."

Sipps are sold on the basis that they put you in control of your pension fund. If you are a sophisticated investor, then the notion of determining exactly where your pension fund goes will be highly attractive. If, like most of us, you prefer to let investment decisions of this nature be made by a professional fund manager, then a Sipp is probably not for you.

Investment range

Permitted investments for self-invested personal pensions:

l Securities quoted on any recognised stock exchange

l Futures/options quoted on recognised exchanges

l Deposits held in UK or overseas

l UK insurance company funds

l UK unit and investment trusts and Oeics

l Tax-exempt unauthorised UK unit trusts

l UK-regulated offshore collective funds

l Commercial land and property

l Over-the-counter stocks

l Secondhand endowment policies

l European life company funds.