A Sipp can boost your pot, but you need a strong head
Self-invested personal pensions promise a lot – but do they deliver? Alessia Horwich and Julian Knight report
Sunday 19 July 2009
At the moment, pensions seem to be on a losing streak. The performance of many personal pension plans has drawn fire from observers, even against the backdrop of the worst recession since the 1930s. Meanwhile, hard-pressed employers are cutting back on providing retirement savings schemes for their staff, and the state pension age, set to rise to 68, could go even higher, according to soundings from senior figures in the City.
All in all, it is difficult to find a good-news pensions story and it's understandable that more investors are looking to take things into their own hands and get involved with their own retirement provision, rather than let employers, pension-fund managers or even the state take care of things. For those that want to take the plunge, a self-invested pension plan (Sipp) gives the holder control over how the pension is invested, particularly as many providers offer the chance to administer pensions online. Nevertheless, Sipps aren't for everyone.
"The whole idea of a Sipp," says Laith Khalaf, pensions analyst at independent financial advisers Hargreaves Lansdown, "is that it's a do-it-yourself pension, it's one for people who want to take an interest in their pension and how it is invested." With a standard pension scheme through an employer or an insurance company there is the choice of a set amount of funds in which to invest pension contributions, chosen by the provider. With a Sipp, the choice can be much bigger and more varied, you can even buy individual company shares and place them in a Sipp.
Another characteristic of a Sipp is its flexibility. Should you wish to change where your money is invested or how much, you can simply transfer your funds using an online management tool or by directly contacting your provider. With a personal pension, changing the way your money is invested can be laborious.
Like other types of pension, contributions into a Sipp attract tax relief but in return there are restrictions on how you can use your pension pot. You also will not pay tax on any growth your fund experiences, and you can withdraw up to one quarter of your fund in a lump sum without paying any tax.
A Sipp works in exactly the same way as buying into a stakeholder or personal pension plan, but instead of your money being put into funds selected by your provider, you will be able to choose how it is invested. Many Sipp providers offer the services of an adviser to guide you through the investment choices. However, if you are up to the task, you can make all the selections yourself and leave the execution to your provider.
The flexibility of a Sipp also applies to the investments it contains. At its most basic, a Sipp can contain straightforward investments such as cash savings or government bonds. The next stage up is unit and investment trust funds, and then there is access to more esoteric investments such as commercial properties and direct share investment.
Other options on the table are derivatives, traded endowment policies and shares in unquoted companies. In short, many investments, from low to high risk, can be included in a pension, but crucially not a second home or other residential property.
However, the more varied your investments within your Sipp the more you are likely to pay in charges. In fact, one of the main drawbacks is the cost. Unlike stakeholder or personal pension schemes, a pensions provider will often charge set annual administration fees for each different type of investment within your Sipp.
So, as the assets in which you choose to invest become more complex, you can expect a higher administration bill from your provider. For example, for someone investing mainly in unit trust funds that can be traded online, fees will probably be quite low; between £300 and £400 per year. However, as the investments diversify into assets such as commercial property, the administrative burden increases and so, therefore, do the charges.
Saying this, there are opportunities to save on scale, so the larger your fund, the smaller the percentage in fees you will pay.
Unless your pension pot totals £100,000 or more, you will probably end up paying a higher percentage of your fund in fees with a Sipp than you would with a personal or stakeholder pension. "Many people don't have fund sizes suitable for self investment," says Fiona Tait, head of business development for pensions provider Royal London. "According to HM Revenue & Customs, only 3.5 per cent of all the people in the UK with a personal or stakeholder pension have a fund of more than £100,000. So, even though Sipps are a good idea, they're not for everybody."
If you do have a considerable amount to invest, you will still need to be interested in managing your investments and have an interest in the growth of your fund. There are billions of pounds across the pensions market that have been invested in mediocre funds which are at best stagnating. In fact, most pensions offered by insurers are sold on the basis of the tax relief rather than the potential return on the investment. As a result, the selected fund managers are often under less pressure to perform well. "With a Sipp you can choose fund managers who live and die by the performance of their fund," says Mr Khalaf, "giving you a better chance of a good return."
If you want to diversify into different markets, a Sipp will give you the facility to do this which a standard pension would not necessarily do. Within a Sipp you can make investments in the American market, emerging markets or the bonds markets, spreading your risk and exposing yourself, hopefully, to better returns. "However, if ultimately you're not interested in running your pension then a Sipp isn't for you," says Mr Khalaf.
Andy Tully, senior policy adviser for Standard Life, adds: "If all you are doing is going in and buying a fund that you could buy in a personal or stakeholder then there isn't much point in being in a Sipp. You need to use the facility; you don't want to be paying for something you aren't using."
Taking control: 'It helped secure the roof over our heads'
Chris Price, 47, from Leeds, and his wife, Helen, run Anastasia Lighting, supplying the hotel and leisure industry. He recently took out a Sipp to release capital from his pension fund by using it to buy a commercial property he already owned.
The property is now held within his Sipp and he receives tax relief on the rental income and any growth in the property's value.
"We decided to take out a Sipp as it was the most tax-efficient way for my wife and I to invest our pensions. We already owned a commercial premises and the Sipp allowed us to release the capital from this building, which we then reinvested back into the business. In the current economic climate it was very nice to be able to do that."
The whole process of acquiring the Sipp with Standard Life was straightforward and the most expensive thing was the solicitor's fees for completing the property purchase. "However, because the property we owned had fallen in value there were no capital gains and therefore we didn't pay any tax when we used our Sipp to buy it."
The scheme was suggested to Chris by his financial adviser. Most of the rest of the investments held by Chris's Sipp are found in standard pensions, including cash accounts and unit trust funds invested in Britain and overseas.
Helen, buoyed by Chris's positive Sipp experience, wants one of her own and plans to use it to buy another commercial property to benefit the business as well as to save flexibly for her own retirement.
As for the Sipp concept, does Chris see it as viable for other investors?
"I would absolutely recommend a Sipp. It's a very tax-efficient way to use your pension pot. Even more so at this difficult economic time.
"In our case it had helped us secure the roof over our head and given a welcome cash injection into the company while keeping our pension secure." He adds: "It's not for everyone I imagine though, as you have to have relatively complex financial affairs to make the whole thing pay."
Derek Pain: I'm cautious, but remain one of the few bulls in the market
Donald MacInnes: Who would want to be a Barbie girl in a non-Barbie world?
Mark Dampier: How to get an income now that savings are past the 'use by' date
Thousands of UK investors could lose out following collapse of Secured Energy Bonds
Bargain Hunter: Fly off for a winter break in France or Portugal for well under £100
- 1 Venezuela Expo Tattoo 2015: Extreme body art from 'Vampire Woman' to 109mm earlobes
- 2 Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
- 3 Ball pool for adults opens in London
- 4 Game of Thrones season 5 trailer: The first full-length look is here
- 5 Rashida Jones speaks out against male-centric porn saying 'women should have sex and feel good about it'
9 reasons Greece's experiment with the radical left is doomed to failure
Have we reached 'peak food'? Shortages loom as global production rates slow
Greece elections: Syriza and EU on collision course after election win for left-wing party
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Liberal Democrat minister defends comments suggesting immigration causes pub closures
King Abdullah dead: We can't afford not to hold Saudi Arabia's royals to account
iJobs Money & Business
£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...
£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...
£13000 per annum: Recruitment Genius: This Pension Specialist was established ...
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...
Day In a Page
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion