Kennymatic/Flickr

Take control of your own retirement with a SIPP (Self Invested Personal Pension). SIPPs are a great idea for adventurous investors as they allow you to manage your own pension rather than leave it to the (very variable) abilities of fund managers. These DIY pensions give you back control so that you can build your nest-egg with greater flexibility and potentially lower costs.

• So what exactly is a SIPP?
• Download the free Hargreaves Lansdown guide to SIPPs
• Should you go for it?
• How much do they cost?
• How to find the cheapest SIPP
• Our favourite, award-winning SIPP product
• Now here’s how to get started

So what exactly is a SIPP?

SIPPs or ‘Self Invested Personal Pensions’ are personal pension wrappers that allow you to pick your own investments or appoint an investment manager to look after the portfolio on your behalf.

A SIPP is a kind of pensions ‘bag’. Inside this bag you can put a broad range of investments that you choose yourself. Once they’re in the SIPP these investments have all the tax benefits and access regulations that all pensions have.

You can use a SIPP to invest in anything from star fund managers to low cost trackers and Exchange Traded Funds as well as equities, cash deposits, futures, commercial property, unit and investment trusts. The pension world is your oyster!

 

Imagine you’re investing in shares or bonds and were able to wrap them in a tax-proof blanket – BUT you couldn’t touch them until you are at least 55. That’s more or less the opportunity and challenge that a SIPP presents.

There’s plenty of information about SIPPs out there – download the free Hargreaves Lansdown guide to SIPPs here which is crammed full of details about what a SIPP is and where you can invest.

What happens when you retire?

As of April 2010, once you’ve turned 55 you can take up to 25% of the pension pot as a tax-free lump sum. What’s left can be used to take out an annuity and provide a taxable income for life – OR you can leave the fund invested and take income from it (known as income drawdown). This applies to SIPPs as it does to any other type of pension.

Should you go for it?

The popularity of SIPPs has grown considerably over the past few years as their costs have come down. Despite what you might think, these are not just for the mega rich or the really clever investor. In fact a low-cost SIPP can offer you more investment choice than most insurance company personal pensions and could cost you less money.

There is a lot of choice in the SIPPs market these days. This is both a blessing and a curse, because there are all kinds of charging structures and investment choices to wade through. The good news? It’s likely there’s something out there to suit your exact needs. The bad news? It may take some effort to find it.

SIPPS are not for everyone. They are best for those who:

• are prepared to put in the time and effort to decide what to put in their SIPP
• have at least £25,000 (better still £50,000) to invest in them
• have the confidence to make their own decisions, rather than trust to pension fund managers (who, let’s face it, regularly get it wrong anyway)

If the above list doesn’t look like you, then you could be better off just going for a cheap stakeholder pension. Whilst you don’t need to be an investment expert to hold a SIPP, you do have to be comfortable making your own decisions and if you do want a plan that offers advice you will generally have to pay more, so it may be that simple stakeholder or personal pension plan is more suitable for you.

How much do they cost?

If you do decide to go for a SIPP there will be two main fees to worry about

• the set-up fee
• and the annual administration fee.

If you go for a low-cost SIPP, which has a limited range of investment options, you should be able to find one that won’t charge a set-up fee and either no annual fee as well, or a significantly reduced annual fee.

More expensive SIPPs, which offer a full range of investment options, will cost you around £300 in set-up fees for a £100,000 Sipp and £500 a year in annual fees. These tend to be flat-rate fees so this is only really suitable if you have a large pension pot to invest.

How much can you invest?

You can contribute up to 100% of your earnings – and enjoy full tax relief on the total – up to the maximum annual limit (which for the current 2009/10 tax year is £245,000). The total amount you are allowed to have in your pension pot overall is £1.5 million. Note that most SIPP providers will ask for a minimum transfer or contribution amount – but this can start from as little as £50 per month.

These payments are made net of tax – so to put £1,000 into a SIPP, it will only cost you £800 and the Government will cover the other £200. If you’re a higher rate tax payer you can claim a further 20% via your tax return and enjoy contributions of £1,000 that only cost you £600. That’s the main joy of pensions generally – the big tax advantage.

How to find the cheapest SIPP

First of all, ask yourself some important questions.

How much is the set-up fee? This could be nothing – or as much as £1,000 so take the time to check.

Is there an annual management fee? This is applied every year and could be a percentage fee (typically 0.5%-0.75%), or more likely a flat-fee of between £100 and £500. Look for one that levies either no fee, or only a very low fee. There may also be annual fees (around 1.5% a year) which are applied to the funds within your Sipp so find out and see if you can have these reduced.

How much are the transfer/exit fees? These are applied when you move money, funds or shares into a SIPP from another provider. Dealing charges are another thing to watch out for as these can vary from one provider to the next.

What is the interest rate? If you’re planning to hold any cash within your SIPP, see what interest rate you’ll get. Inflation can quickly erode cash savings if the interest rate isn’t competitive – rates vary from as little as 0.1% to a more appealing 5% so always check the rate if you’re going to keep money in cash, i.e. savings accounts.

How to get started

First of all, decide what you want from your SIPP and make sure you get the right one for your needs. Don’t pay extra by going with a provider that allows you to invest in commercial property if you don’t plan to do exactly that.

Broadly speaking there are three SIPP types to choose from:

• low-cost SIPPs,
• insurance SIPPs
• ‘full SIPPs’.

Low cost SIPP

Investment level: Beginner to intermediate

One of the pleasant knock-on effects of the introduction of Stakeholder pensions is that the costs for pension provision have been forced down elsewhere. Low cost, usually online, providers being a case in point, and this has helped bring down the cost of SIPPs. Low cost or ‘Supermarket’ SIPPs offer a selection of funds, stocks and other investments for you to choose from within the confines of your SIPP.

Yes you have to do the selecting (that’s the low-cost element!) so it’s time to study those funds, shares, stocks, bonds and what not. Alternatively you could keep it fairly simple and dependable and pick tracker funds that are on a pretty reliable wicket.

With a low-cost SIPP you can make your own investment choices without using an IFA (that’s independent financial adviser). Expect a more limited range of investments to pick from – usually funds, cash and shares – often in exchange for no set-up and either no annual fee or a low annual fee (although you will still pay dealing costs for buying and selling shares).

• Competitive providers include Fidelity Fundsnetwork, Hargreaves Lansdown.com, James Hay and Killik. None of these providers charge set-up fees.
• The Vantage SIPP from Hargreaves Lansdown is one of the most popular low-cost SIPPs around winning a plethora of awards including being voted Best SIPPs Provider by readers of What Investment in 2007, 2008 & 2009. This really is a cheap option with no set-up fee, no transfer in charges (although there are transfer out charges – see comment below), no annual charges on cash and over 2,000 funds and free fund dealing. Find out more here.

Insurance SIPPs

Investment level: Intermediate

Now we are in the realm of paying for investment advice as part of the service here.

The alternatives of cheap, simple stakeholder pensions and low cost SIPPs renders Insurance (also known as Deferred or Hybrid) SIPPs an option that most should avoid.

They work by putting your money into one fund until it has grown sufficiently to be used as a SIPP. It’s fairly effortless for you but no less effort than selecting a simple Stakeholder pension containing tracker funds so we don’t really see the point.

Full SIPPs

Investment level: Advanced

These are high risk, high effort, large investment required, but the highest potential return. It’s all up to you so you’d better be prepared to do the necessary research.

You might expect these Sipps to be low cost because you’re putting in all the effort, but they may not necessarily be cheap because the full SIPP providers will charge you for every trade you make. They may even charge you for ‘inactivity’!

If you’re feeling up to the challenge of managing your own fund then, according to Robbie Burns in ‘The Naked Trader’ who ‘loves’ his full SIPP, you’ll need two things:

• An execution-only stock broker (online ones are cheapest – we like TD Direct Investing)
• A pension trustee

The trustee looks after your money keeping it secure in a recognised pension account (i.e. you can’t dip into it before you are 55) for an annual fee of around £150 to £500. When you pay however much of your salary you want into your full SIPP the tax rebate will be added automatically.

It might be best to start with a broker you like, such as TD Direct Investing, and then see if they have any special deals with good pension trustees.

If you are going to go down this route then remember, you are looking for long-term growth and this is money that you are going to really need when the time comes around. So keep the risk level low to moderate.

Useful Links

• Download the free Hargreaves Lansdown guide to SIPPs
• Try execution-only online stock brokers TD Direct Investing