Introduction to personal pensions Self-invested personal pensions explained
Some people don't want a pension company deciding how their pension savings are invested - they want to control where their money goes and how it grows. This is where self-invested personal pensions (Sipps) come in.
A Sipp is a do-it-yourself pension. You can choose what investments you want to put your savings into, and keep control of your savings. Sipps can be managed online - Sipp websites look a bit like online banking portals. You can see how much money's in your pension and where it's invested.
Sipps can also be suitable for people who want to gather all of their pensions into one pot before they retire, or for those who want to keep their money invested after they retire so that they can draw down an income from it. The greater pension freedoms may persuade more people to opt for a Sipp pre-retirement to start actively managing their fund.
Go further: Income drawdown explained - find out how this alternative to annuities works
What can Sipps invest in?
- Stocks and shares.
- Investment trusts listed on any stock exchange.
- UK government bonds, plus bonds issued by foreign governments.
- Open ended investment companies which are recognised by the Financial Conduct Authority.
- Gilts and bonds.
- Exchange traded funds traded on the London Stock Exchange or other European markets.
- Bank deposit accounts including non-Sterling accounts.
- Commercial property.
- Real estate investment trusts listed on any stock exchange.
- Offshore funds.
Some Sipps start at as little as £50 a month – but it’s worth noting that the wider the range of investments, the higher the minimum level of investment. You can top up your Sipp with lump sums, but you cannot exceed £40,000 a year from 2016/17.
Who are Sipps suitable for?
- People comfortable with their own investment decisions and want a wider range of investments
- People with a larger pension 'pot' or who will be making significant pension contributions
- People with a financial adviser making decisions on their behalf
- People looking to consolidate all of their pensions into one place
- People who want to keep their money invested after they retire so that they can draw down an income
Doesn’t sound like you? See our guide, Introduction to personal pensions, for other options.
- Set up fees: anything from £0 to £500.
- Annual charges: could be a percentage – 0.5%-0.75% or a flat fee, of between £100 and £500.
- Fund fees: usually around 1.5% a year but could be lower
- Exit fees: can vary
Like all pension schemes, SIPPs qualify for up to 45% tax relief on the money you put into them.
The only similarly tax-efficient wrapper is a stocks and shares ISA, but these have an annual contribution limit of £15,240 from April 2016. The annual limit for tax relief on pension contributions is £40,000. Read more about ISAs in our guide, Stocks and shares Isas explained.
If you own commercial premises, Sipps can offer valuable tax relief. You can 'sell' your premises to the SIPP and free up funds to re-invest. There are also inheritance tax benefits. Our Inheritance tax explained guide goes into more detail on how this tax works.
These offer the widest choice of investment, but they have the highest charges and are really only suitable for people with large pension funds. The average sum invested in this type of SIPP is between £150,000 and £450,000.
- Fees: Can be flat or percentage of investment. Some full Sipps have an initial set up fee, an annual management charge (usually 1% for a £50,000 pot) and trading charges. Many providers will also ask for a minimum contribution per month.
- Providers: Alliance Trust, Rowanmoor, Hornbuckle Mitchell, Standard Life, Suffolk Life
Low cost Sipp
These offer a wide range of investment choice but don’t include owning property directly, offshore funds or investing in unquoted shares. Low-cost Sipps may be more suitable for people with smaller pension savings to invest.
They are normally ‘execution only’, meaning you take no advice from the firm. This makes the charges lower. Typically you'll pay up to £10-£15 for online trades, with telephone trades at around 1%.
- Fees: Low cost Sipps shouldn’t charge AMCs or set up fees except for investment funds, but expect dealing costs if you’re gong to buy and sell shares.
- Providers: Fidelity Fundsnetwork, Hargreaves Lansdown, James Hay, AJ Bell Youinvest, Charles Stanley Direct, Barclays Stockbrokers.
‘Hybrid’ or insurance SIPPs
These are offered by insurance companies. Usually you’ll have to pay a substantial amount of money into the insurance company’s own funds before you’re allowed to choose your own assets, so if you want control over your investment from the start, go for a full Sipp.
- Fees: Hybrid Sipps may charge initial set up fees and annual management fees, but these tend to be capped at around £300 and £600 respectively. There are usually no dealing fees.
- Providers: Axa, Legal & General, Aegon
Is a Sipp right for me?
You should only consider opening up a Sipp if you have the experience of investing and are completely comfortable making your own decisions. Some investments that you can place in a Sipp are risky, and may not be suitable for you. It's always worth seeking independent financial advice before making a decision about investing your money.
If you don't have experience, a stakeholder or personal pension may be more suitable for you. You'll may have a more limited choice of investments, but you could choose a fund that has a range of assets in it, rather than picking your own.
Sipps can also be very expensive, and their charges could eat into your returns if you only have a small amount invested. That's why Sipps are more suitable for people with larger amounts of savings.
Go further: Financial advice explained - how to find the right financial adviser
- How to invest - Learn about portfolios and asset allocation
- How much money will I have in retirement? - How your different pension pots and benefits will add up
- The Which? Money Helpline - Get expert advice on your pension investments
Which? Limited (registered in England and Wales number 00677665) is an Introducer Appointed Representative of Which? Financial Services Limited (registered in England and Wales number 07239342). Which? Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Registered office: 2 Marylebone Road, London NW1 4DF.