Money
Pensions
SIPPs: Self invested personal pensions
Back in April 2006 (also known as 'A'-day) the rules governing pension contributions and investments changed. The new regime allows much greater potential freedom in building up a pension, which has increased the attractiveness of SIPPs, writes pensions expert Dr Ros Altmann
'SIPP' stands for 'Self Invested Personal Pension'. These used to be relatively little-used, niche products in the pension arena, however they have now become the latest 'fashion', with many more providers offering them.
As the name suggests, SIPPs are pension arrangements allowing you to choose what to invest in, rather than just having a limited number of funds managed on your behalf by a pension provider in a traditional personal or stakeholder pension. If you are keen to manage your own portfolio of investments, or if you want to invest in a widely diversified range of assets, a SIPP may be worth considering.
There are many reasons to use a SIPP, rather than a traditional personal or stakeholder pension. However, before you decide to transfer any existing pension savings into a SIPP you really must get financial advice. Make sure you do not lose any valuable guarantees (such as guaranteed annuity rates), employer contributions or benefits such as life insurance, by transferring. SIPPs are only really suitable for you if you are happy to take responsibility and make your own investment decisions.
SIPPs have several potential advantages. They allow you to take control of your own investments, to potentially consolidate all your pensions in one place and give you a wide range of flexibility. You can hold unquoted shares, fund of hedge funds, private equity, commercial property, third party loans, exchange traded funds, residential property investment trusts, derivatives and so on. You can manage them on-line or by phone and it is much easier to take income drawdown from a SIPP, by taking your 25% tax free cash and just leaving the other 75% invested in the SIPP.
However, there are many providers in the market, and more entering all the time, so it is also important to check carefully what you are being offered, since not all SIPPs are the same. In particular, make sure you understand what investment options are available to you, since some providers restrict the investments you can hold. To build a large, diverse investment portfolio, make sure the SIPP will allow all the asset classes you are planning to buy, since SIPPs often do not permit investing in such things as unlisted shares, overseas or commercial property and derivatives. Also make sure that the SIPP you choose will allow income drawdown, if you are not sure whether you want to buy an annuity before age 75.
The biggest drawback of a SIPP is normally the charges and it is important to shop around to find good value. Make sure you find out about all charges, since some may be hidden in the small print. Also see if you can find out what the quality of administration is like and what tools are provided to help you with portfolio planning and risk control.
For many people, SIPPs will be an ideal pension vehicle, but if you are in a company scheme, have a modest pension fund or want others to make investment decisions for you, then the charges of a SIPP may not be worth incurring. Flexibility is only worth paying for if you are going to use it.
