How to choose the right SIPP
Jane Baker gives the lowdown on SIPPS, which, for many people, are a great way to save for retirement.
This article was first sent to readers as a '360 degrees' email.
The popularity of self-invested personal pensions - aka SIPPs - is really starting to take off. In the beginning these plans were only really suitable for people who had a very large pension pot already, which could then be transferred into a SIPP. Thankfully, today, a low cost online version is giving these schemes a far wider appeal.
A SIPP gives you much more freedom and flexibility when it comes to deciding how you want to invest your pension, and allows you to consolidate several different pension schemes into one plan.
You can then invest your money in a whole range of assets from investment funds (including unit trusts and OEICs) to individual shares to commercial property. And this has proved to be attractive to pension savers because new SIPP plans have sprung up all over the place.
Plenty of choice is a great thing in theory, but it makes it tricky to settle on the right plan for you in practice, especially as no two SIPPs are the same. Pick the wrong one and you could end up paying over the odds for features you don't really need.
So, to make sure you set up a suitable SIPP, let's take a look at some of the different types:
Hybrid SIPP
A Hybrid SIPP is like a half-way house between a traditional personal pension scheme and a SIPP. These plans are offered by insurance companies including AXA, Friends Provident and Legal & General.
The most important thing you need to know about Hybrid SIPPs is you'll normally be expected to pay a fair chunk of money into the company's own investment funds before you'll be able to choose your own assets.
This has caused controversy since some providers have been accused of using these rules as a way of raking in cash into their own in-house funds, rather than being in the best interests of the SIPP holder.
That said, not all hybrid plans are horribly restrictive. The Legal & General Portfolio Plus SIPP, for example, offers access to the Cofunds fund supermarket where you can choose from over 300 funds run by range of fund management groups. Alternatively, you can put your opening contribution into funds managed by L&G itself.
On the downside, if you want to pay monthly into L&G's SIPP, your contribution will have to be invested in their in-house funds, and you'll need to put away at least £200 a month. What's more, you won't be allowed to put your money into anything more exotic than investment funds until your pension pot is worth a whopping £25,000 at least.
Hybrid SIPPs aren't really suitable for you if you want to self-invest from day one. If you do, then you need to think about opening a full SIPP.
Full SIPP
If you fancy taking full advantage of self-investment, this type of SIPP could be right up your street. Full SIPPs are usually run by specialist pension companies (although insurance company, Standard Life also offers one). As the name suggests, these plans offer access to a wide range of assets in addition to standard investment funds.
The assets which can be held within a full SIPP normally include:
- Investment trusts
- Single company shares
- AIM listed shares
- Unquoted shares
- Gilts/bonds
- Cash
- Overseas investments
- Traded endowments
- Derivatives (including futures and options)
- Commercial property
Note not all SIPP providers will offer everything shown on the list.
When it comes to choosing a full SIPP, it's really important to look at the costs involved. Unfortunately, there's no standard charging structure which does make it difficult to compare schemes. And, to make matters worse, some charge flat fees while others charge a percentage of your investment.
Typically, you'll be charged a fee to set the SIPP up as well as an annual administration charge. Putting shares in your SIPP will also incur dealing costs. And if you're planning to use your SIPP to invest in commercial property this is where the fees can really start to add up.
It may be time consuming but do your homework before you commit to a scheme. And be careful you don't pay for any features you have no intention of ever using. You'll find the more sophisticated SIPPs, which offer access to the full range of assets, often have higher set up and ongoing costs. If you don't need this much investment freedom, don't shell out for it!
Low cost online SIPP
But what if you're not a wealthy, sophisticated pension investor? Should you forget all about SIPPs and stick with personal pensions? Well, I don't think you should dismiss them now there's a new breed which you can manage yourself online at a siginifcantly lower cost than a full SIPP.
There are plenty of these low cost schemes about including the Vantage SIPP from Hargreaves Lansdown, Sippdeal's e-sipp, Fidelity Fundsnetwork and James Hay's e-SIPP. You'll normally be able to invest in a far greater range of funds and other assets through a low cost SIPP than you would via a traditional personal pension, and that's why I think they have the edge.
Take the Vantage SIPP from Hargreaves Lansdown, for example: Here you can choose from a huge range of investment funds and with over 1,900 of them, there's no annual administration charge. (Other funds cost 0.5% with a maximum annual charge of £200 + VAT.)
There are annual management charges attached to running the funds themselves which typically cost 1.5%, but there are plenty of discounts available. What's more, there's no cost for setting the SIPP up, and dealing costs start at £9.95 per trade if you want to put shares in the SIPP too. Overall, this makes Vantage a competitively-priced plan, and with a minimum contribution of just £50 a month it should be within reach of most budgets.
In a nutshell, you can easily run your plan online which allows you to keep track of performance and switch your investments around if you wish. So, what you get with a low cost SIPP is the opportunity to self-invest without paying sky high charges, making these schemes suitable for many more of us than ever before.
More: How to cope with pension cutbacks | Why you should boost your pension with your savings
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Dear James Alliance originally made charges to transfer existing pensions in and to transfer out, and they still do, so watch out! The annual charge is only now in its first full year, originally there was no such *maintainance charge*, so I think we can guess where they are going. The only saving grace is that they do rebate part of the commission they receive for the funds they sell, although the choice they offer is very restricted as yet. Its SIPP is really only suitable for those who are already used to making their own decisions about buying and selling single-company shares and investment trusts. The latter IMHO are very poorly understood which is why we had that whole split-cap scandal. Relatively few people who are not already retired have the time to micro-manage their funds in the way this particular scheme needs, and relatively few have a *pot* that is big enough to diversify to spread the risk and justify these charges. If you can attain a *whopping* £25k pot (see Harvey Jones' excellent article of 27 May) that is the average on retirement, and even Hargreaves Lansdown thinks it is only £30k. This could be achieved over five to ten years by contributing £3600pa gross on trades of £500, but to buy [i]and to sell[/i] each is £25, or 5%, plus you pay stamp duty on the purchase and if it's an investment trust also its own internal management costs, usually lower than on unit trusts/OEICs. The lure of flat-rate trading is that each individual sum looks small, but for the small investor (as most of us here are in the beginning) percentage-wise it can be quite a high cost even before you've amortised the annual charge and its VAT over the pot, which again in the early days would be a high percentage. BTW, a female retiring today with the same £25k pot would get only £28 a week rather than £34 for a man, and both would have to shop around. I commend Harvey's article to all - pension provision is more flexible and transparent than it has ever been, but only if you follow his Foolish advice and save in many ways by any means you can will you escape poverty when you retire; certainly don't rely on the State. Sorry for this looong post, you young things just cannot know how important to you this is. Save Now! Then save more!
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The fact you haven't mentioned Alliance Trust Savings' online SIPP has knocked my confidence in the rest of the articles I see on your site. They make an annual charge of £75 + VAT and charge £12.50 per trade. And that's it (apart from corporate actions charges, of course). Any SIPP that makes a charge based on your capital should be avoided like the plague. Afterall it's SELF invested; they should keep their mucky mitts off your money!
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28 May 2009