Self-invested personal pensions (Sipps)
Is a Sipp pension for you?
By Paul Davies
Article 2 of 3
Is a Sipp pension for you?Understand what the pros and cons are of transferring your pension into a Sipp and the charges that you might incur.
Pension transfers into Sipps
Sipps can be an attractive home for existing pension ‘pots’ currently tied up in other schemes.
If you’ve worked for several employers, you’re likely to have multiple pensions, and bringing them together may reduce fees and give access to better investment performance.
Only around 10% of Which? members currently hold a Sipp, but this has increased under the pension freedoms from 2015 onward.
A Sipp allows you to transfer all your pensions into one place, keep the money invested in the stock markets if you want it to continue to grow and gives you the flexibility to draw an income using income drawdown.
Pension transfers make up a high percentage of most Sipps but not all pension schemes are suitable targets for such a switch.
Find out more: Pension transfers - the pros and cons
Final salary options for Sipps
These (defined benefit) schemes normally offer an unbeatable deal.
As well as a guaranteed pension, they provide generous benefits for spouses that are hard to replicate in private schemes.
So they’re unlikely to be suitable for transferring into a Sipp.
Defined contributions into Sipps
Defined contribution schemes (DC) are the more likely transfer candidates.
The pension they pay depends on investment performance, how much you put in and the deduction of any charges.
It’s normally not worth moving if you’re a current member of an employer’s DC scheme, however, as you would lose your employer’s contribution.
However, some employers will agree to make payments into your Sipp instead.
Personal pension switch to Sipps
If you belong to a private personal pension scheme, switching to a Sipp may be more worthwhile.
But be careful to check for any exit penalties, such as the MVRs (market value reductions) levied by some with-profits funds.
Sipp investment choices
Sipp providers give a wider choice of funds than personal pensions and often make this their main selling point.
The underlying assumption is that self-selected investments offer better growth prospects than default funds.
A more subtle difference also worth noting is if you have several scheme-invested pots. If each scheme has a similar investment strategy, such as tracking the FTSE 100, a sudden fall can leave you badly exposed – particularly if you are nearing retirement.
Bringing your pension savings together in a Sipp offers more opportunity to diversify and to keep track of where everything is invested.
You can spread risk by holding money in corporate bonds, unit trusts and Isas, as well as both UK and overseas equities.
Find out more: The Which? investment portfolios - use our tool to create a balanced portfolio
Charges for Sipp pensions
Although Sipps have the potential to deliver higher growth, it’s important to be mindful of the charges.
These can be hard to quantify as the amount you pay depends on the type of Sipp you hold, the investments you choose and your level of trading.
Full Sipps normally charge flat fees, but some providers make a percentage charge. Check carefully before you decide - both for initial and annual charges as well as trading costs.
The impact of charges on your investment is a crucial consideration.
Administration charges for a full Sipp can be £450 or more a year, equivalent to 1% for a £50,000 pot.
On top of this, you will need to pay fund fees of up to 1.5%, plus trading charges.
Charges for low-cost Sipps
Which? looked at charges for low-cost Sipps provided by 14 of the largest investment brokers in November 2016.
We compared the costs for someone transferring three pensions totalling £200,000 into a Sipp: £150,000 put into funds and £50,000 into shares. The charges incurred by 10 online trades (five into funds, five into shares), plus platform charges over the first year were included.
|The costs of managing a Sipp|
|Annual admin fee||Pension-transfer fees||Annual platform fees (%)||Annual platform fees (£)||Dealing charges||Total cost over 1st year|
|Alliance Trust Savings||£216||n/a||n/a||n/a||£125f||£341|
|The Share Centre||£172.80||n/a||n/a||n/a||£171g||£343.80|
|Halifax Share Dealing||£180||£180||n/a||n/a||£125i||£485|
|Charles Stanley Direct||n/a||n/a||0.25%a||£447.92||£57.50j||£505.42|
|AJ Bell Youinvest||n/a||n/a||0.25%b||£475||£57.25k||£532.25|
|TD Direct Investing||£240||n/a||0.3%||£450||£62.50q||£752.50|
aThe 0.25% custody charge on shares is waived for each month there is a chargeable trade. bFunds and shares (max £25 per quarter) charged at 0.25%. cFee applies to entire £200k. dCharge is 0.3% on first 50k; 0.25% above that. eCost of holding shares is capped at £200 per year.f10 x £12.50. gDealing option (frequent) is £20+VAT per quarter and 10 x £7.50. You don't pay quarterly fee if you don't trade in that period. hQuarterly fee of £20 (2 trades per quarter are free). i10 x £12.50. jShares only: 5 x £11.50. kFunds: 5 x £1.50; shares 5 x £9.95. lShares only: 5 x £8.95. mFidelity doesn't offer share dealing; £50k invested in investment trusts instead and service fee capped at £45. nShares only 5 x £11.75. oShares only: 5 x £7.50. pShares only: 5 x £15. qShares only: 5 x £12.50. rShares only: 5 x £11.95. sShares only: 5 x £11.95.
Rates may have changed since and Alliance Trust Savings recently confirmed it was putting charges up in February 2017.
Long-term outcomes of Sipps
Pension saving is a long-term process. Unless you’re comfortable monitoring funds and making regular investment decisions, you may be better off leaving an Independent Financial Adviser (IFA) to make your investment decisions for you.
You may even prefer to stay with a traditional personal pension or stakeholder scheme, opting for a default, cautious managed or tracker fund.
Sipps are ideal for some
Sipps offer a great opportunity for some investors. They can be attractive investment vehicles for business owners or a way of accumulating a worthwhile retirement fund. With the new pension freedoms, more people might be tempted to open a Sipp before then using the income drawdown facility at retirement.
What they do offer is choice. Tom McPhail, of Hargreaves Lansdown, says: ‘Given the rapid movement of insurance companies towards offering Sipps, where they used to sell personal pensions, I suspect Sipps will become the individual pension plan of choice for the majority of private investors in the future.'
- Last updated: December 2016
- Updated by: Paul Davies