Here's a profitable project to ponder if you like DIY.
The idea of managing your own pension can fill most people with dread - and so it should. After all, if things went pear-shaped you will have nobody to blame but yourself. But despite the dangers, I have been running my own retirement fund profitably through a Self-Invested Personal Pension, or SIPP, for a number of years. And here's why.
Firstly, I am a big DIY fan. Generally, I am happy to undertake most tasks that I consider to be within my capabilities rather than pay for professional help. In fact, at the weekend, armed with rubber gloves, wellies and a set of drain rods, I successfully unblocked my outside sewer -- it would have cost me almost £200 if I had called out a drain doctor. Naturally, I had to do some basic research on the Internet first to assess the difficulty of the job at hand before I plunged in.
Of course, unblocking a sewer is not quite the same as managing your own pension. But my point is why should I leave my retirement nest egg in the hands of underperforming fund managers, who, in common with some plumbers, are going to charge me a hefty fee for doing something I can do myself?
This leads conveniently onto what you can put into your pension pot. Currently you can put UK shares including AIM shares and approved overseas equities into your SIPP. You can also invest in investment funds, as well as futures and options. Additionally, gilts and even commercial properties are allowed to be put into a SIPP.
The important point is not what you can put into your pension but what is right for you. It would be ludicrous, say, to stuff your SIPP with risky futures and options if you don't know what you are doing -- it would be crazy even if you did know what you were doing! But the range of allowable investments means you can choose specific strategies that suit your investment style and personality.
Another reason why I like SIPPs is the tax incentives. SIPPs, in common with most other types of pensions, get tax relief on contributions. So investments will benefit from being grossed up by basic rate tax relief. For every £1,000 that is paid into a SIPP say, the pension pot will be topped up to £1,282 by the government. What's more higher rate tax payers can claim additional relief.
It can be argued that ISAs benefit from tax relief, too. And broadly speaking, SIPPs and ISAs offer similar benefits. However, SIPPs may work out slightly better if you are a higher rate taxpayer now, but expect to be a basic rate taxpayer when you retire and take income from your pension.
How much you plan to contribute into your pension is something else to consider. Currently, you are not allowed to put in more than £7,000 a year into an ISA. But with SIPPs, you can contribute 100% of your earnings up to a maximum of £215,000 a year! That said, everyone can contribute up to £3,600 into their SIPP regardless of earnings.
And perhaps the main reason why I like SIPPs is that unlike other investments such as ISAs, it stops me from dipping into my retirement nest egg until I am ready to retire.
Of course there are some downsides to consider, too. Under current rules, a SIPP provider will charge an initial set-up fee, which can typically be around a couple of hundred pounds. Additionally, dealing charges may be slightly higher too, though these are gradually coming down as SIPPs increase in popularity.
In my view, SIPPs may not be right for everyone because, of course, you may not be a good investor. But if you have had success at investing, then there are few things more satisfying than making your pension grow. Well, one thing does spring to mind, but hopefully I won't have to unblock my sewer again for a little while.