Planning for retirement is often confusing and stressful. With various types of pension schemes available, how do you know which is best for you? There’s a lot of choice out there, so we’ve put together an article covering what you need to know about SIPPs, and whether they might be the right option for you.
- What is a SIPP?
- Is a SIPP Right For You?
- Start Investing in a SIPP
- Alternative Options to Consider
- More Useful Reading
Self-Invested Personal Pensions (SIPPs) are a form of personal pension that give you the freedom to choose and manage your own investments. Unlike most personal pension schemes where your investments are managed for you within the pooled fund you have chosen, SIPPs allow you the flexibility to choose and manage your own investments. There’s also a greater variety in the types of investments available, too. Which in the long-term can make a significant difference to your pension, and the size of the pot when you eventually retire.
Some of the types of investments which can be held in a SIPP are:
- Unit trusts
- Open Ended Investment Companies
- Investment trusts
- Commercial property
- Corporate bonds
The freedom and flexibility of SIPPs mean they are primarily designed for people who feel comfortable investing and are happy to dedicate time to managing their pension fund. If things go wrong, you only have yourself to blame. While anyone can open a SIPP, they come with more responsibility than other pension schemes. Every investment carries risk and you’ll need to be confident to regularly review your investment performance and make your own decisions.
Whether a SIPP is the right choice for you depends heavily on how important choice and flexibility are to you. If it isn’t a priority for you, you’re probably better off looking at other types of pension schemes available to you.
However, two of the key reasons you might choose to open a SIPP are if:
You have experience investing
- You have control over the investments you choose which means greater responsibility.
- There’s also more flexibility with a wide range of funds and assets to choose from.
- Might increase potential investment growth, but also means you need to be aware of your attitude to risk, and how much you’re willing to take.
Your pension fund is large, or you intend to invest a large amount
- SIPPs can be more hands-on for both you and your SIPP provider which can lead to higher charges and fees than with other pension products.
- If your pension pot is large though, you may be able to soak up these additional costs. Even with a low initial investment, if you begin to significantly increase contributions once the SIPP is in place, this may offset charges.
It’s not as difficult as you may imagine to start investing in a SIPP. You do need a little bit of background knowledge, so if you’re new to investing read our investment guides for beginners before you get stuck in.
Pick a Pension Company
There are plenty of pension providers out there, but they all charge and operate differently so it’s important to do your research.
For example, Interactive Investor charge a flat fee of £120 a year (+ VAT), making it a good option for those with larger sums. Instead of having to pay a percentage of their investments, you know exactly how much you’ll have to pay upfront. Whereas, AJ Bell offers a 0.25% annual charge on investments and is suited for those who may have smaller pension funds. Different companies charge in various ways, it’s always worth comparing funds to find which one best suits you and your circumstances.
These are the fees and charges you should check out when looking into a pension provider:
- Set up fee – The initial charge for setting up your SIPP. This can vary from nothing up to £500!
- Annual management charge – Charged as either a percentage of the total amount you’ve invested or a flat fee that’s deducted each year. Some companies also reduce their charges when your invest over a certain amount.
- Dealing charge – You can buy and sell investments in your SIPP at any time but this can incur multiple dealing charges.
- Administrative charges – You may need to make account changes that come with administrative charges, such as transferring your pension to another provider, early closure, or splitting a pension in a divorce.
Choose Your Funds
One key aspect of SIPPs is that you get to choose which funds you invest in. Although personal pension schemes have greater variety in investment opportunities now than they used to, a SIPP does offer you the widest range of investment opportunities.
You can also find out the past performance of all funds offered by a pension provider on their website. However, any investment carries risk, and unfortunately a good track record does not guarantee future growth.
Manage Your SIPP
Once you’ve set up your SIPP you’ll be able to view and manage it online through your chosen company’s website. It’ll need careful management so review all of your funds on a regular basis to make sure they’re performing well. If any of your funds are falling in value, think about transferring them to maximise your investments.
A SIPP might not be the option that suits your financial plans the best. Make sure you consider these alternatives first, before taking the plunge!
These are a type of stocks and shares ISA, but, as the name suggests, the difference here is that you get to choose, buy, and sell the investments yourself rather than having a fund manager do so for you. This is a great option for people who like having more freedom and flexibility with their investments, although it’s not for everybody. These types of products are targeted towards confident investors, and if it’s an option you’re considering, best practice is to always speak to a financial advisor first.
As an ISA though, any money invested doesn’t necessarily have to be used for retirement. This can be a useful alternative for people who are further away from retirement. You still have the potential to grow your money through various investments without having to lock it away for decades.
Personal Pension Schemes
The main difference between a personal pension and a SIPP is the investment options and the way they charge. Most personal pension schemes now offer a wide range of investment opportunities within their funds already, so unless you’re looking for a specific type of investment, or are investing large sums, a SIPP may not be worth the extra charges and responsibility.
Stakeholder pensions (SHPs) are a type of defined contribution pension scheme and work in a similar way to personal pension schemes. They’re set up as individual contracts between you, the member, and the pension provider and are designed to be accessible to everyone. Their choice in investments is much more limited but is an option suited to inexperienced investors.
For more information on pension options and how to save for retirement, check out these articles next.