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."
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