Mar 15

SIPPs – The cheapest way to build up a DIY pension

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Take control of your own retirement with a SIPP (Self Invested Personal Pension). SIPPs are a great idea for adventurous investors, because they allow you to manage your own pensions and choose from a huge range of investments. This type of DIY pension means you can build a nest egg with greater flexibility and potentially lower costs.

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, they follow the rules of all pension investments – including the tax benefits and the fact that you cannot withdraw funds from the SIPP until the age of 55.

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!

Read this easy-to-read guide to SIPPs here.

What happens when you retire?

Since the introduction of pension freedoms, there’s much more choice about what to do with a SIPP at the age of 55. You can cash in the lot, buy an annuity, or leave it invested and draw funds as and when you need them.

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: a low-cost SIPP can cost less than an insurance company personal pension.

There is a lot of choice in the SIPPs market these days. This is both a blessing and a curse, because while it means there should be something to suit your needs, it also means you’ll need to check each product’s charging structures and investment choices in order to find the right one.

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 £40,000) to invest in them
  • have the confidence to make their own decisions

If the above list doesn’t look like you, then you could be better off just going for a cheap stakeholder pension. There’s far less choice, but if you’re a stakeholder pension kind of a person, that’s part of the appeal. You can check out our step by step guide to getting this kind of pension.

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, or a significantly reduced one.

More expensive SIPPs, which offer a full range of investment options, cost 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 in 2016/17 is £40,000. The total you are allowed to have in your pension pot overall is £1 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

Get hold of the key facts documents of the SIPP providers, and check some important details.

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

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 one. There may also be annual fees (around 1.5% a year) applied to the funds within your SIPP, so check this too.

How much are the transfer/exit fees? These are applied when you move money, funds or shares into a SIPP from another provider, or transfer out.

What are the dealing charges? These are levied when you switch investments within the SIPP wrapper. They vary between providers, so are well worth checking.

What is the interest rate? If you’re planning to hold any cash within your SIPP, see what interest rate you’ll get. They can be as low 0.1%, so check the rate if you’re going to keep money in cash.

How to get started

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 knock-on effects of the introduction of Stakeholder pensions is that pension charges dropped across the board. It has heralded the introduction of low cost, or ‘Supermarket’ SIPPs, which offer a selection of funds, stocks and other investments.

You can expect a more limited range of investments to pick from – usually funds, cash and shares. In return, there’s usually no set-up fee and either no annual fee or a low annual fee. You will, however, still pay dealing costs.

You have to do the selecting yourself too, which means getting to grips with funds, shares, stocks and bonds – although you could keep it fairly simple and pick tracker funds.

  • Competitive providers include Fidelity Fundsnetwork, James Hay and Killik. None of these providers charge set-up fees.

Insurance SIPPs

Investment level: Intermediate

These are otherwise known as deferred or hybrid SIPPS. They work by putting your money into one fund until it has grown sufficiently to be used as a SIPP. However, if you use this type of SIPP you will pay for investment advice as part of the service, and it’s not really necessary.

A cheaper alternative is to start with a simple stakeholder pension, and switch into a low cost SIPP when you have built up sufficient funds.

Full SIPPs

Investment level: Advanced

These are high risk, require high effort, and only work with large investments. However, they also offer the most choice, and 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 in fact they 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’, you’ll need two things:

  • An execution-only stock broker (online ones are cheapest – we like TD Direct Investing)
  • A pension trustee – who looks after your money, keeping it secure in a recognised pension account, for an annual fee of around £150 to £500.

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

If you are going to go down this route, remember, this is money that you are going to really need when the time comes around. So keep an eye on the risk you are taking.

The Money Advice Service recommends that if you are considering a SIPP, it’s worth taking advice to be sure it is right for you.

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Nerina Coost
Nerina Coost

An important correction:
Hargreaves and Landsdown DO charge transfer fees on their Vantage SIPP as follows (I am quoting from their HL Vantage SIPP Fees Schedule):

Transfer Out to UK scheme £75 + VAT
Transfer Out to Overseas scheme £250 + VAT

Please ensure your readers have all the facts!


Thanks Nerina, very helpful!

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