Should You Pick A Personal Pension Or A SIPP?

Harriet Meyer looks at the pros and cons of SIPPs.

If you’re seeking flexibility and an array of options for retirement planning, a self-invested personal pension could be for you.

As their name suggests, SIPPs work like a DIY pension. You pick the investments yourself and place them in the tax efficient wrapper, in the hope of building a hefty retirement fund.

They are subject to the same contribution limits and tax advantages as personal pensions, with the ability to take a 25% tax free lump sum at retirement, but are essentially a more sophisticated plan.

This is because they enable you to pick from a whole universe of investments, rather than a simple list of funds. In April 2006, the restrictions on allowable investments were scrapped, and billions of pounds has been pouring into these schemes ever since.

What can you invest in?

Unlike a stakeholder or personal pension, full blown bespoke SIPPs are special because they enable you to invest in anything. This includes shares listed on the Alternative Investment Market (Aim), futures and options, and hedge funds.

They can also be used to invest in commercial property, such as offices, shops, industrial units and agricultural land. Using this option, the property can be leased, even to yourself, with the rent being paid into your SIPP.

So how do you know which pension plan to pick?

It depends where you want to invest. If you simply want access to a decent range of funds, a standard personal pension should suffice.

However, if you’re keen to invest in individual shares and private equity, for example, then a SIPP is the only route for you. Bear in mind, though, that while some will offer the full range of investments, others won’t, so choose carefully.

At one end, you will find the ones linked to stockbrokers, where you can buy and sell funds and shares, while at the other, there are bespoke providers that are geared up to take any investments, including commercial property.

What about charges?

The general rule is that the more types of investment you can choose from, the higher the cost of the SIPP. Very low-cost plans may only offer an enhanced range of funds compared to the average personal pension, plus stocks and shares.

There are a few more types of charge to worry about with SIPPs than with personal pensions. First, there’s a set-up charge, which averages around £300 for a £100,000 SIPP. Behind this average, however, there’s a lot of variation, with charges ranging from nothing on plans from some providers to £600 or more on others.

Set-up costs for some more sophisticated SIPPs may appear high if you don’t have a large amount to invest initially, while others have low set-up charges but may impose higher annual or dealing fees.

For annual fees, SIPP providers don’t work on a percentage fee basis, offering a flat administration fee for doing the job. So, if you search for a reasonable fixed fee, it won’t cost you as much as your pension pot grows, and it is a better charging structure for those with higher sums to invest. Typically, these fees range from £500 to around £1,000.

Then you have transaction fees for each share purchase alongside the charges for any funds you invest in. But the growth of fundsupermarket SIPPs has brought these charges down, as many offer discounted initial charges, such as Hargreaves Lansdown’s Vantage SIPP.

How much do I have to invest?

With a SIPP, minimum investments may be higher than on stakeholder and personal pensions. These vary, but for example, Standard Life requires a minimum lump sum of £10,000 or a monthly premium of £300 for its SIPP.

How can I decide whether to take the SIPP route?

The decision on whether to opt for a SIPP over a standard personal pension rests on how wide-ranging you want your investments to be.

If you want to pop a few more esoteric investments in your pension, such as private equity and individual shares, a SIPP is your only route. Just be sure you’re comfortable with the risk you’re taking and that you’re not paying for something you don’t want!

Finally, remember that fundamentally, taking control of your investments is a good thing! We should all take an interest in our own nest egg, so take time to choose the right plan for you.

More: The UK's Cheapest Pensions | Choosing A Low Cost SIPP