How to take control of your pension

If you’re looking for a more flexible pension, take a look at Sipps, says John Greenwood

Sipps (self-invested personal pensions) has been a buzzword in the world of pensions for over two years now, and their meteoric rise shows no signs of abating. More than a quarter of a million people have taken out Sipps since new rules, introduced in April 2006, ushered in an era of unprecedented flexibility in pension saving.

Those new regulations meant that for the first time, millions of people in company pension schemes could set up their own personal pensions too. Restrictions on how much you can pay into your pension each year were also swept aside, replaced with a new cap equal to £235,000 or an amount equal to your annual earnings, whichever is the lower. The Government also made it easier to take money and benefits out of pensions.

Yet, despite all the headlines, some experts believe the Sipp story has been over-egged, and argue that in many cases you are better off with traditional pension arrangements. The FSA, the financial services watchdog, is so concerned at the public's seemingly endless appetite for Sipps that it has warned financial advisers they should not recommend the products when cheaper personal pensions would be more suitable.

Miracle pensions product or the next mis-selling scandal?

The reality of Sipps falls somewhere in between. Sipps can offer significant benefits to people wanting a low-cost pension savings vehicle and also allow investments that conventional plans cannot accommodate. But there are several different types of Sipp on the market and not all will be suitable for your circumstances.

Sipps are not going to solve your own personal pension crisis all by themselves – that can only be achieved by making sure you pay a realistic amount into your retirement savings plan. But used properly they can help you reach your target pension pot more quickly than traditional alternatives.

So what is a Sipp?

Sipps are personal pensions where you, or your financial adviser, decide what your pension savings are invested in.

They offer a far wider choice of mutual fund investments than traditional personal pensions, which generally only offer around 20 funds from one provider..

Unlike personal pensions, Sipps can also hold investment trusts, venture capital trusts, stocks and shares, and commercial property. They can also hold exchange-traded funds, options, and traded endowment policies.

At present, Sipps are unable to hold funds built up from contracting out of the state second pension, formerly known as Serps, although a Treasury consultation on the issue is ongoing and it is expected that this will become permissible in October.

There are three distinct types of Sipp on the market, all of which differ in the range of different asset classes they allow you to invest in.

Supermarket Sipps

Supermarket Sipps are the most basic form of Sipp, typically only allowing you to deal in unit trusts and shares, but they can run at a very low cost. For DIY pension investors who believe they can pick the best funds themselves, supermarket Sipps offer an attractive alternative to the balanced managed funds that are usually the default option on company and personal pensions.

More than 80 per cent of us tick the default box when we join our company schemes, which means that millions of British workers are suffering sub-standard investment performance in dismal life office funds. The average life office balanced managed fund has returned just 60.8 per cent in the last five years of rising markets, compared to a return of 90 per cent even for the average UK equity tracker fund. Star fund managers have performed even better.

While transferring out of a final salary scheme is almost never a good idea, switching your defined contribution pension into a supermarket Sipp is easy. But you should only go down this route if you think you have sufficient understanding of investment markets to manage your fund choices. Putting your eggs in one basket, buying at the top of the market and selling at the bottom are just some of the classic mistakes that can turn your Sipp experiment into a disaster. However, many Sipp providers will give you regular investment updates, fund manager recommendations and online guides to help you construct a sensible portfolio.

Hargreaves Lansdown's Vantage Sipp and similar products from Alliance Trust and Killik & Co allow you to set up and run a Sipp for free, apart from the fund charges. This could save you roughly an extra 0.5 per cent in charges, which can have a considerable effect on your returns over the long term.

"Supermarket Sipps can offer very good value. For example, the HSBC FTSE All Share tracker costs just 0.25 per cent a year, including pension wrapper charges through Vantage, compared to a charge of 1 per cent through HSBC's own stakeholder pension," says Tom McPhail, head of pensions policy at Hargreaves Lansdown.

For some popular funds life insurers are able to negotiate better annual management charges than supermarket Sipps, but in the majority of cases they are more expensive.

If you think you are likely to hold individual shares in your pension portfolio, make sure your Sipp provider allows it as not all do and dealing charges vary; most charge between £10 and £30. Some also charge one-off fees for transferring pension assets from other providers or switching funds, so make sure you check the small print.

Life office Sipps

Life office Sipps are offered by several of the traditional pension companies. They offer similar services to supermarket Sipps, although the one offered by Standard Life, the biggest player in the sector, allows commercial property investment too for an extra charge.

Life office Sipps are generally only available through Independent Financial Advisers (IFAs) and therefore will end up costing you more either through commission or advisers' fees, but you will benefit from expert investment and tax advice.

Last year the FSA warned IFAs against recommending Sipps where personal pensions were more suitable. It was concerned that the Sipp bandwagon was driving savers happy with the handful of funds available through personal pensions, into self-invested products with higher charges. If your financial adviser recommends putting you into a life office Sipp, ensure that it is because you expect to be using its extra flexibility.

"Far too many people have been put into life office Sipps by IFAs when they would have been better off sticking with their original stakeholder pension plan," says Robert Reid, director of Syndaxi Financial Planning.

Full Sipps

Full Sipps are more expensive than the other types of Sipp, and are for people with larger funds who are using their pensions to set up complex financial arrangements. They are offered by smaller specialist firms such as James Hay, Pointon York Sipp Solutions, Suffolk Life and AJ Bell, as well as Standard Life.

One benefit of full Sipps is their ability to allow people who run small businesses to invest their pensions in the commercial premises they occupy. This can be done either on an individual basis or partners or directors can use their Sipps together to purchase the property. Borrowing of up to 50 per cent of the assets held in the Sipp is allowable, and rental income is paid gross into the Sipp.

The Government had planned to allow residential property in Sipps, but this was withdrawn after a public outcry over the effect it could have on property prices. While the idea was criticised by many in the industry, it certainly helped raise the profile of Sipps. Although Sipps may not be ideal for everyone, they can certainly help canny investors build up pension funds more quickly than they could otherwise.

What to watch out for when transferring pension benefits into a Sipp

Switching benefits out of a final salary scheme and into a Sipp is almost always a bad idea. This should only be done after receiving personal independent financial advice.

Some defined contribution occupational pension schemes offer tax-free cash entitlements higher than the standard 25 per cent you are allowed with a Sipp. Ask the trustees before switching out.

Old-style retirement annuity contracts often offer you guaranteed annuity rates that you would not be able to get on the open market. By moving to a Sipp you would lose access to this valuable benefit.

Some company schemes may have negotiated lower charges than you can get through a Sipp, and may have access to external funds that are better than your default option.

Exit penalties on some with-profit pension funds may make it not worth your while switching out. However, paying new contributions into weak with-profit funds does not make sense and these can be diverted into a Sipp. It may also be worth sticking with with-profit funds where there is the chance of a windfall payment.

Independent Partners: 10 top tips for retirement. Get your free guide here

News
peopleFrankie Boyle responds to referendum result in characteristically offensive style
Sport
Lewis Hamilton will start the Singapore Grand Prix from pole, with Nico Rosberg second and Daniel Ricciardo third
F1... for floodlit Singapore Grand Prix
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvHe is only remaining member of original cast
Arts and Entertainment
tvHighs and lows of the cast's careers since 2004
PROMOTED VIDEO
Sport
Fans hold up a scarf at West Ham vs Liverpool
footballAfter Arsenal's clear victory, focus turns to West Ham vs Liverpool
New Articles
i100... she's just started school
News
news
New Articles
i100
Life and Style
Couples have been having sex less in 2014, according to a new survey
life
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
Sport
football
New Articles
i100... despite rising prices
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Senior BA - Motor and Home Insurance

    £400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

    Market Risk & Control Manager

    Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

    SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

    £320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

    Head of Audit

    To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

    Day In a Page

    Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

    Despite the result, this is the end of the status quo

    Boyd Tonkin on the fall-out from the Scottish referendum
    Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

    Manolo Blahnik: Flats, Englishness, and Mary Beard

    The shoe designer who has been dubbed 'the patron saint of the stiletto'
    The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

    Scrambled eggs and LSD

    Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
    'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

    'Normcore': Blending in is the new standing out

    Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
    Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

    New leading ladies of dance fight back

    How female vocalists are now writing their own hits
    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam