Money: The great escape from below-par pensions

You can pay twice over for a poor investment showing - in lost profits and in getting out of the contract. There is an alternative, reports Isobel Berwick

WHEN YOU sign up for a personal pension you are putting a lot of trust in one firm to manage your investments. If the funds don't perform well it can be expensive to get out of the contract.

There is an alternative. A self-invested personal pension plan (SIPP) may be a better choice for the well-off and those close to retirement who don't want to buy an annuity as soon as they stop work. If you have enough money - pounds 200 a month or a lump sum of pounds 100,000 is about the minimum - and want to keep a close eye on your pension investments, consider a SIPP.

A "pure" SIPP plan is usually run by a firm you may never have heard of: James Hay, Cater Allen, and Winterthur are among the big players. They offer the pension "wrapper" - the legal and administrative side of running the pension. What goes into the pension fund is left up to you.

SIPPs can accept a wide range of investments, including commercial property. In a pure SIPP arrangement, you simply tell the manager what to buy and sell and they keep track of your investments. You'll pay a fee of between pounds 250 and pounds l,000 to set up a SIPP, plus an annual fee of pounds 75 upwards, or a percentage of the value of your pension fund. You'll probably also be charged for buying and selling investments within the pension.

SIPPs may not suit everyone. But they have clear charging structures (unlike most personal pensions) and the policy can run until the owner is 75. This does away with the need to swap to a separate income drawdown policy after retirement if you decide to leave your investments intact rather than take an annuity.

SIPPs have suddenly become popular with independent financial advisers (IFAs), and if you want to discover more you need to be sure you understand what you're buying. Some SIPPs are more genuine than others.

What's shaken up the market is that the insurance giants have started to market "hybrid" SIPPs. These offer a combination of normal pension investment in the life company's own funds, plus the option to self-invest some of the rest.

Life company SIPPs do suit some customers. Christine Ross, an IFA, says: "Legal & General, Scottish Equitable and Sun Life all offer SIPPs which are good value for someone who can pay in pounds 200 a month and wants to build up a pension fast."

If you decide to opt for a hybrid SIPP you will usually have to commit at least pounds 20,000 to the insurers' own funds. Jamie Ware, managing director of Churchill Investments, warns: "You have to put in this minimum amount with the life company funds to get reduced charges for your self-invested money. Insurance companies will push to get you to leave as much as possible in their own funds."

If an IFA suggests you buy a life company SIPP, ask how much commission he or she earns. Life companies will pay more commission than a true independent SIPP provider, so there is an incentive to sell the packaged pension from a familiar name, especially if the adviser is not familiar with SIPPs.

A final warning: if you are nearing retirement and considering taking an income drawdown plan with an IFA, make sure you raise the subject of SIPPs as well. The advantage of taking out a SIPP before you retire and consolidating your pension funds there is that you can move investments that don't perform.

With income drawdown schemes you have to commit all your pension funds to one life firm, which then invests them for you. You can withdraw income each year but you can't move your money to another manager if your chosen firm gets its investment strategy wrong. Your money is stuck there until you decide to buy an annuity.

So why are some IFAs selling life firms' drawdown schemes rather than either type of SIPP? Yet again it seems commission is to blame. Selling drawdown schemes is lucrative: up to 6 per cent of the total fund value goes to advisers. The Personal Investment Authority is investigating these payments, but in the meantime advisers are free to sell drawdown schemes to clients with pounds 100,000 or more in their pension funds. And pounds 6,000 for the advisers isn't bad for an afternoon's work.

q Churchill Investments has a new guide to SIPPs. It cost pounds 7.50, but `Independent on Sunday' readers can order it for pounds 5 including postage and packing from: Churchill Investments, 3 Sidcot Lane, Winscombe, Somerset, BS25 ILA.

q Isobel Berwick is deputy editor of `Moneywise' magazine.