Self-invested personal pensions (Sipps) Is a Sipp pension for you?
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.
Some 47% of Which? members with pension savings belong to two or more schemes, although only 7% have a Sipp.
Pension transfers make up a high percentage of most Sipps but not all pension schemes are suitable targets for such a switch.
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 and, for many schemes, this has been disappointing.
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.
Alternatives to Sipps
If you don’t think a Sipp is the right place to park your main pension savings, it may still be a healthy alternative for accumulated additional voluntary contributions (AVCs).
‘Protected Rights’, held by those who contracted out of the second state pension (S2P) and accumulated in a separate fund, may also do better in a Sipp.
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, Real Estate Investment Trusts and the Alternative Investment Market as well as both UK and overseas equities.
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.
A low-cost Sipp can cost as little as 0.25% in a FTSE all-share tracker and 0.8% in managed funds.
Typically you’ll pay between £9.95 and £14 for online trades, although this can rise to £30 depending on how much you invest.
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 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.
As Malcolm Cuthbert, of Killik & Co says: ‘Sipps are just an efficient tax wrapper and it’s what’s inside that matters. If you’re not prepared to take any risk with your pensions then Sipps might not be for you.’
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. However, they can also be a costly headache for the unwary.
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.'
Which Ltd is an Introducer Appointed Representative of Which? Financial Services Ltd, which is authorised and regulated by the Financial Conduct Authority. Which? Mortgage Advisers, Which? Insurance Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.