Self invested personal pensions are fast becoming mass market. We look at how you can take control of your pension without paying over the odds.
Many people now take control of their investments and protect them from the taxman using ISAs. Indeed, over 3m of us took out a share ISA last year. There is another way to shelter your investments from tax however, although until recently its use has been mostly confined to the obscenely wealthy.
Yes, I'm talking about self invested personal pensions, commonly known as SIPPs. Like ISAs, SIPPs allow you to invest in a wide range of investments. In fact, SIPPs allow a broader range of investments than ISAs, allowing you to put money into AIM companies and commercial property for example.
Although SIPP investment has soared in the last couple of years, only about 100,000 people are using them at present. In terms of total money invested, the gap is a lot closer. Around £70b is invested in share ISAs, while the amount held in SIPPs is £35b.
Consolidate your pensions
Most of the money currently going into SIPPs doesn't come from new contributions. Instead, people are using SIPPs to consolidate their old pensions, which could have been built up over decades and spread over several companies.
They've got fed up with high charges and with poor performance that is inadequately explained. SIPPs allow you to see all your pension investments in one place, making it easier to see how they're doing and what size pension you might get.
So what's the catch?
So, are SIPPs too good to be true? Some people are certainly concerned about the rush of money going into them.
On one side there are concerns that many people are not using SIPPs to their full effect, and only investing in the investment funds controlled by their pension provider. In this case, people are paying over the odds, as a straightforward personal pension would suffice and this has lower charges. At the other extreme, there are concerns that many people will pile all their retirement funds into a series of high-risk investments and lose the lot.
Both of these are valid concerns but, as you might expect here at The Fool, we think more people taking direct control of their investments is undoubtedly a good thing. Just be sure that you're comfortable with the risk you're taking on before going down this route. While it's true that most private investors don't beat the market, the same is also true of professional fund managers!
Choosing a low-cost SIPP
The rush of new money going into SIPPs has had one healthy side effect. Charges have come down quite significantly although there are some concerns they might creep back up again now that SIPPs are regulated by the FSA (regulation began in April of this year).
There a few more types of charge to worry about with SIPPs than with ISAs. First of all there is usually a set-up fee, which can be a few hundred pounds although some SIPPs charge nothing. There are also annual fees - here the trick is look for a fixed fee, rather than a percentage based one that will cost you more and more each year as your pension pot (hopefully) swells in size.
Then you have transaction fees for each share purchase. These can be as cheap as standard online brokers now, which is good news. Also, check what rate of interest you'll get on any uninvested cash.
Finally, there a range of sundry charges like exit fees and for choosing an annuity when you finally get round to drawing your pension.
Here at The Motley Fool, we've recently launched our own SIPP, which is administered by A J Bell. You can find full details here.