It's possible to unleash yourself from pension providers and take control of your own retirement planning. A Sipp, a Self Invested Personal Pension, allows you to personally manage the choice of investments. Pick the right provider and do your research and you can shear serious costs from your pension, ensuring you gain.
Don't understand pensions?
First read the more basic Boost Your Pension Saving article.
Sipps in a nutshell
A Sipp is a completely DIY pension. Unlike a normal pension, where the pension company limits your choice of investments it manages, a Sipp gives you complete control of your pension pot – for better or worse.
Like all pensions, it has the killer feature that you can pay the money in before income tax is taken off. This means when a basic 20% rate taxpayer invests £100, it only costs £80; the amount that would've been in their pay packet (see the How Pensions Work article).
With a Sipp you choose your investment (with or without the help of an advisor). Then when you retire and your Sipp comes in (ha ha… sorry), you can use these assets either to provide you with an income or to buy an annuity; a fixed annual payment until you die.
Is a Sipp for me?
The big advantage of Sipps over other pension plans are that they offer greater flexibility, choice of investment and possibly lower costs. They were originally aimed at those with larger pension pots, but as charges have come down, it is now possible to run a Sipp even if you're only putting £50 per month in your pension.
Yet be under no illusions, a Sipp is for someone who understands investing, does the research and works at it. If you make the wrong investment choices, you've only got yourself to blame, so you must feel comfortable managing your own investment portfolio and picking your own shares and funds. Otherwise, simply stop reading here and go to the Pensions MoneySaving guide instead.
There's nothing stopping you taking a hybrid approach and running a Sipp alongside a more traditional pension or company scheme; just do it with a portion of your pension savings, and keep the rest elsewhere..
How much can I put in?
There are limits to the amount you can save and still get tax relief.
Earners. You can contribute 100% of your annual earnings before tax up to a limit of £235,000 for the 2008/09 tax year. This will increase by £10,000 a year until 2010/11.
Non-earners. You can contribute up to £3,600 per tax year and still get basic-rate tax relief. So, non-workers can pay in £2,880 per tax year, to which the taxman will add £720.
On top of this, your employer can put money in as part of your pay, and you can transfer in existing pensions or other assets (e.g. shares from a company share scheme). Yet for pension transfers, be very careful of complex exit penalties from your existing scheme.
What can I invest in a Sipp?
Sipps provide a massive range of investment choice, including individual shares, stock-market and property funds, futures and options, Reits, unquoted shares, gilts (government bonds) and company bonds, cash and commercial property. You can even invest in your own business by using a Sipp to buy commercial premises, while borrowing up to half of the purchase price.
Is it true that you can put a buy-to-let home in a Sipp?
Well it was true. The Government had announced it was going to allow you to put residential property investments (i.e. buy-to-let) and ‘esoteric' investments such as fine wines, classic cars, art and antiques into Sipps after A-Day.
Yet in Dec. '05 this was soon shelved, as it realised many wealthy investors were chomping at the bit as a way to buy second and holiday homes, on the cheap, inside a pension. I even remember being called by the BBC which was looking at doing a series on ‘pension holiday homes'.
All Sipp providers aren't the same
In general, the more sophisticated your Sipp and the wider the range of investments chosen, the more it will cost to set up and administer. To have a Sipp, you need to appoint an administration company plus a trustee, which can both be part of the same group, though in many cases the Sipp provider automatically handles this for you.
The possible Sipp charges:
Set up fee. It can cost up to £500 just to set up a Sipp.
Annual management fee. A yearly cost that bites a chunk out of your investment.
Dealing charges. Each time you buy and sell an investment you pay a fee.
Transfer fees. If you're moving money into a Sipp from another pension or shares you may be charged (and if you move it elsewhere).
Interest rate. While not a charge, if you’re only earning a pitiful rate of interest on your cash, it’ll certainly feel like one; and compared to inflation you’ll be losing money. Interest rates on cash left in a Sipp vary from 0.1% up to 5%; if you’re going to keep money in cash check the rate.
Together, these can add up to thousands of pounds a year for larger portfolios.
The Cheapest Sipp Provider
Quite deliberately I'm not going to look at the costs for more complex Sipps, as then the likelihood is the Sipp cost is secondary to the functionality anyway. My aim is to compare Sipps which allow you to invest in a wide range of shares and funds but ignoring direct investment in commercial properties.
The lowest charge Sipp provider
Hargreaves Lansdown* (with its Vantage Sipp) is one of four providers (the others being Fidelity, James Hay and Killik) that don't charge a set-up fee. However its other charges make it the clear winner.
Low or no annual management charges. It doesn't charge an annual management fee on the large number of investments where it can earn an annual renewal commission, and charges an annual fee of nearly 0.6% capped at a maximum of £235 for all others.
Sharedealing fees. It has dealing charges for buying and selling individual shares online ranging from £5.95 to £11.95 (See table of charges).
Is a Sipp safe?
With normal savings accounts, the simple rule is that up to £85,000 per person per institution is fully protected should your bank go bust, by the UK's Financial Services Compensation Scheme (FSCS) (Read Savings Safety guide). Yet if you put money in stocks and shares or funds that invest in them, then you’ve got a “risk based” investment NOT savings, and a totally different FSCS protection applies. Critically...
FSCS protection for SIPPs is very complex, and can vary with each product's structure. This is just a general guide, always check with your provider.
It's very important to understand that this protection with investments applies if you lose money due to the product provider of the investment going bust, in this case the fund manager that you've bought into through the Sipp. Yet if the underlying investment goes bust, i.e. you have shares in a company and it goes kaput, or you've bought a fund and it performs poorly, then you’ve no protection as that’s the nature of investing.
What level of protection do I get?
Usually with Sipps, the broker you buy it through e.g. Hargreaves Lansdown, doesn't hold any of the cash; it simply acts as a conduit for you to put the money into whatever funds or investments you want. Therefore in the unlikely event it went bust, your money should be OK, and still held with by the fund manager or bank it resides with. The protection applies should any of those go into default.
If the operator of a fund, trust or other investment vehicle you have put money into goes bust, you are eligible for compensation up to a maximum limit of £50,000.
If you decide to hold the money as cash within the Sipp, you are then normally covered under the standard £85,000 cover per person per institution, the same as normal savings get.
Ask your Individual Sipp provider which bank the cash is held in (often they spread it around up to five). Then check whether any other savings you may have are in institutions linked to those used for the Sipp cash, as cumulatively you'll only get up to £85,000 protection in each (See Institutional links table).