Deciding where to invest the money in your pension fund has tended to be a decision that people in Britain have been happy to leave to somebody else. If you're fortunate enough to have a workplace pension, the chances are that it will have a default investment option for anyone who doesn't wish to take responsibility for their investments themselves. This has historically been where most employees' money has gone.
But over the past couple of years an increasing number of savers in the UK have begun to develop an appetite to manage their own pension savings - partly in search of higher returns, but also driven by a desire to have greater control over their pension.
Since 1999, the number of people with so-called "self-invested personal pensions" (Sipps) has increased more than sevenfold. And while Sipps were once perceived to be a niche product for the super-wealthy, they are now becoming much more common across people of all income brackets.
Undoubtedly, the rise in popularity in Sipps has been helped by recent changes in the law. Three years ago, the Government announced plans to allow Sipps to invest in residential property, as well as other exotic asset classes such as fine wines, art and classic cars. These changes would have allowed savers to put buy-to-let properties into their pension, sheltering both the rent and any capital gains from tax. However, at the last moment - and after thousands of people had taken out Sipps in anticipation of the new regime - the Government unexpectedly axed these rules.
While the industry might have expected sales of Sipps to plummet, they have in fact continued to grow just as strongly over the past 15 months. By the time the Government changed the rules relating to residential property, dozens of providers had already launched Sipps, and had begun heavily marketing them. Although the rule changes were a set-back, it was not enough to kill the momentum.
Last week, the Financial Services Authority introduced new rules to regulate Sipp providers for the first time - a move designed to increase consumer protection in light of Sipps' rapid growth.
Tom McPhail, the head of pensions research at Hargreaves Lansdown, the Bristol-based financial advisers, which runs its own Sipp platform, believes that Sipps are set to become dominant in the pensions market over the next few years, completing replacing other forms of personal pensions.
WHAT IS A SIPP?
Self-invested personal pensions are effectively just a tax wrapper. A Sipp itself is not an investment, it is simply the shopping basket which holds your investments, and which ensures you get generous tax relief on everything in the basket. McPhail says that of the money held in Hargreaves Lansdown Sipps, around 50 per cent is invested in mutual funds - such as Oeics, unit trusts and investment trusts. These are professionally managed portfolios, usually comprising of equities or bonds. A further 25 per cent of money in Sipps is invested directly in stocks and shares, while the remaining 25 per cent is in cash-related investments.
IS A SIPP BETTER THAN A WORKPLACE PENSION?
If your employer offers a workplace pension, then they will also probably pay a percentage of your salary into the scheme every month. For this reason alone, it is well worth joining your work pension scheme, and paying in as much as you need to maximise your employer's contribution. For example, your employer may offer to pay 5 per cent of your salary into your pension each month, on the condition you pay the same amount.
Unfortunately, the average company still only makes a modest contribution to its staff pension scheme, if any at all.
Hence, if you want to be able to retire with a pension that affords you the standard of living you are used to, you will probably need to make additional savings.
As a rule of thumb, take the age at which you started saving for a pension and halve it. This is the percentage of your salary that you need to be saving each month to provide yourself with a good pension.
Although you can make additional contributions into your workplace pension scheme, the chances are that you will be limited in terms of investment choice. New rules which came into force last year, however, allow you to open a Sipp, as well as to continue saving in your workplace pension. The greater flexibility means it's well worth putting any additional savings into a Sipp rather than your workplace scheme.
WHAT CAN I PUT IN MY SIPP?
As well as giving you access to a much greater range of mutual funds than regular pensions, Sipps also allow you to hold individual stocks and shares, commercial property, commodities, derivatives and a number of other assets in your pension. Ian Westwater, technical manager for Abbey Wealth Management, says one popular option for owners of small businesses is to use their pension fund to buy their offices or business premises. "The Sipp purchases the property and leases it to the company, which in turn pays rent back into the Sipp," he says. "Keeping the property in the Sipp means there's no capital gains tax, and there's also no tax on the rent paid into the scheme."
HOW MUCH DO SIPPS COST?
The charges vary enormously, so if you're thinking of getting a Sipp, it's important to find one that is suitable for your needs. However, the good news is that the recent growth in the popularity of Sipps has helped drive down prices. According to independent researchers Defaqto, the average set-up fee has fallen by 13 per cent over the past year alone.
Set-up fees vary between nothing and around £600, and some Sipps will also charge an annual fee of several hundred pounds on top of that. Others simply charge you for each transaction you make within the Sipp. "Property is the monster," warns McPhail. "If you directly invest in commercial property in your Sipp, you're going to easily spend a couple of thousand pounds on charges."
John Moret, a director at Suffolk Life, a specialist Sipp provider, says Sipps with higher set-up fees tend to be suitable for clients with larger portfolios, or who want to invest in specialist products. "For a more flexible type of Sipp, you'll be looking at a fee of £300 to £400 a year," he says. "Obviously If you've only got a portfolio of £10,000, that's not going to look very attractive."
It's also worth keeping an eye on the rate your Sipp provider will pay you on any cash in your portfolio. Some providers pay poor cash rates, well below the Bank of England base rate, as a means of clawing back income from their customers.
CAN I TRANSFER OTHER PENSIONS INTO A SIPP?
If you've worked at several places, the chances are you'll have a different pension from each of them. Moret says that one of the attractions of Sipps has been the chance to merge all these into one fund.
McPhail points out that you can now administer, and even trade in, many Sipps online - including the likes of Hargreaves Lansdown's and FundsNetwork. "The attraction of being able to look at all your pension savings in one place is a big pull for a lot of people," he says.
Moret warns that people with final salary pensions should think twice before transferring them. When you come to retire, a final salary pension will pay you a percentage of your salary at the time you left the company. Although most schemes will happily give you a lump sum to transfer out of their scheme, this is often not worth as much as hanging on and taking the income in retirement.
CAN I TAKE MY MONEY BACK OUT OF A SIPP?
Not until you reach 55. Saving in a pension is still the most tax efficient way to save for retirement, but it does lock up your money. It's well worth keeping some additional savings in an ISA, which you can access whenever you want. There is nothing to stop you transferring this into your Sipp at a later date, and receiving the additional tax relief.
For more information about Sipps, Hargreaves Lansdown publish a free guide, available at www.h-l.co.uk/pensions_and_retirement/sipp_guide.hl. To find an independent financial adviser in your area, visit www.unbiased.co.uk.
Alternative ways to save for retirement
* If investing in a Sipp doesn't take your fancy, it's still important to make some provision for your retirement - and putting your money into a pension, be it at work or into a regular personal pension, still remains the most tax efficient way to save.
* If your employer is willing to make a separate contribution to your pension, it's well worth joining the company scheme.
* Investors can put up to £7,000 each tax year into an ISA, where all capital growth and income remains tax-free. No more than £3,000 can be held in cash, although up to £7,000 can be invested in stocks and shares. You can now roll this money into a pension, and receive the full tax relief later.
* Investing in residential property is popular. Your primary residence where you live is not subject to capital gains tax. If you move to a smaller property in retirement any gain you make on the sale of your old home will be tax free. Or you can release capital from your home using an equity release plan.
* Many financial advisers recommend against using your home as a substitute for pension saving. When it comes to retirement, you may not feel you want to trade down to a smaller property. And releasing equity from your home may leave you with no assets to pass on to your children.
* Another alternative is to invest in buy-to-let property. However, all rent and growth in the capital of the property will be taxed.
'It's great being able to keep track of my savings'
Mark Golesworthy, 36, from Caterham, Surrey, took out a self-invested personal pension plan (Sipp) with Hargreaves Lansdown in 2005. "I'm a reasonably professional investor, and wanted to have the ability to pick and choose funds within my pension myself," says Golesworthy.
With a handful of different personal and workplace pensions to his name, Golesworthy was also attracted to Sipps by the opportunity to consolidate all his investments in one place. "I've transferred about four old plans into my Sipp so far, and I've got another three to go," he says. "It's great to be able to keep track of all my pensions savings in one place, and I can view my balance online and trade online as well."
Golesworthy says he now finds himself checking his pension every day, and is a regular trader in stocks, shares and mutual funds. Over the past year alone, he has made a return of 35 per cent on his portfolio, and now has £150,000 saved up.
Golesworthy has not yet used his Sipp to invest directly in commercial property because his portfolio is not yet large enough. But he may consider doing so in the future. For now, he gets his exposure to the asset class by investing in commercial property funds.