People are increasingly choosing to manage their retirement investments with a self-invested personal pension (Sipp). Which? explains why, 30 years after their launch, Sipps are more popular than ever.
What is a Sipp?
Sipps can provide a cheap, flexible and straightforward way to save for your retirement. 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 come in.
A Sipp is basically a do-it-yourself pension. You can choose what investments you want to put your savings into, and keep control of your savings. The pension ‘wrapper’ will hold your investments until retirement, at which point it can be turned into income.
They are a good option for people who want to gather all of their pensions into one pot before they retire. Sipps entered the mainstream in the wake of the 2015 pension freedoms, which gave people more control of their retirement savings. It’s estimated that savers now own around two million products in 2019, containing assets of approximately £180bn.
This guide will primarily look at the DIY Sipps offered by fund supermarkets and investment brokers.
Types of Sipp
Full Sipps: These offer the widest choice of investment, but they have the highest charges and are really only suitable for people with relatively large pension funds. Full Sipps are aimed at experienced investors who require a high level of sophistication, such as investing in commercial property
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: Rowanmoor, Hornbuckle, Suffolk Life, Dentons Pension Management
DIY or lite Sipp: These offer a wide range of investment choice but don’t include owning property directly, offshore funds or investing in unquoted shares.
DIY Sipps are offered by fund supermarkets and are 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.
Fees: Low-cost Sipps You can pay a fixed admin charge or a % platform fee, of a combination of both. There are also usually dealing costs for buying and selling shares. See our full analysis of fees and charges below.
Providers: Hargreaves Lansdown, James Hay, AJ Bell Youinvest, Charles Stanley Direct, Interactive investor.
What can Sipps invest in?
Bringing your pension savings together in a Sipp offers more opportunity to diversify and to keep track of where everything is invested.
One of the main appeals of Sipps is that they allow you to invest in a wide variety of assets, from stocks and shares to exchange-traded funds (ETFs), from cash to property. The full list of Sipp asset classes is detailed below:
- Stocks and shares
- Investment trusts listed on any stock exchange
- UK government bonds, plus bonds issued by foreign governments
- Unit trusts
- Open ended investment companies (Oeics)
- Gilts and bonds
- Exchange traded funds (ETFs) 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
Who should consider a Sipp?
Retirement savers choose a Sipp for a number of reasons.
When we recently asked Sipp owners why they had opted for the product, nearly half said it was because they eventually wanted to use income drawdown – the most popular response. Gaining more control (41%), optimising growth (38%) and bringing various pensions together (26%) were other key reasons given.
Generally Sipps are suitable for:
- People comfortable with their own investment decisions and who 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
Sipp fees and charges
How much you pay in charges is important. They are deducted from your pot regardless of how your investments perform and can dampen your returns. Over the long term, high fees can cost you thousands of pounds and limit the amount of money in your final retirement fund.
Sipp providers have different charging structures that can make comparisons difficult. You’ll typically be charged either a fixed annual administration fee or an annual platform fee, which is levied as a percentage of the amount you’ve invested. However, some companies charge both admin fees and platform fees, which will invariably push up overall costs.
Our table shows how much it will cost to manage your Sipp with 13 leading investment brokers. Figures include transfer, platform and administration fees as a total value and as a percentage of the total pension value.
|Company||Fee structure||Total cost - £50k pot||Cost as a % of pot (£50k)||Total cost - £250k pot||Cost as a % of pot (£250k)||Total cost - £500k pot||Cost as a % of pot (£500k)|
|Alliance Trust Savings||Fixed admin fee only||£252||0.50%||£252||0.10%||£252||0.05%|
|AJ Bell Youinvest||Platform fee only||£125||0.25%||£625||0.25%||£875||0.18%|
|Barclays||Fixed admin and platform fee||£340||0.68%||£740||0.30%||£1,240||0.25%|
|BestInvest||Fixed admin and platform fee||£270||0.54%||£870||0.35%||£1,120||0.22%|
|Charles Stanley Direct||Platform fee only||£175||0.35%||£875||0.35%||£1,375||0.28%|
|Close Bros||Platform fee only||£125||0.25%||£625||0.25%||£1,250||0.25%|
|Fidelity||Platform fee only||£175||0.35%||£500||0.20%||£1,000||0.20%|
|Halifax||Fixed admin fee only||£150||0.30%||£240||0.10%||£240||0.05%|
|Hargreaves Lansdown||Platform fee only||£225||0.45%||£1,125||0.45%||£1,750||0.35%|
|Interactive Investor||Fixed admin fee only||£240||0.48%||£240||0.10%||£240||0.05%|
|James Hay||Fixed admin and platform fee||£359||0.72%||£675||0.27%||£1,200||0.24%|
|Selftrade||Fixed admin and platform fee||£269||0.54%||£769||0.31%||£1,144||0.23%|
|The Share Centre||Fixed admin fee only||£180||0.36%||£180||0.07%||£180||0.04%|
Rates were correct as of September 2019. Interactive Investor calculations uses the Investor subscription plan. The James Hay sipp admin fee is waived if £200k or more is in qualifying investments
The analysis shows that for smaller pots, providers charging percentage fees are more competitive.
Companies such as AJ Bell Youinvest, Charles Stanley Direct, Close Brothers and Fidelity levy relatively modest percentage platform fees of between 0.25% and 0.35%, making them low-cost options in our £50,000 scenario (between £125 and £175 over a year).
Providers that apply both fixed annual administration charges and percentage platform fees are costliest. James Hay was most expensive in our analysis (£359, including the transfer fee). Fixed-fee providers such as The Share Centre, Interactive Investor, Halifax and Alliance Trust Savings prove the most cost-effective for larger pots.
Opting for one of these could save you up to £1,500 over a year on a £500,000 pension, compared with Hargreaves Lansdown, which charges a platform fee of 0.45% on the first £250,000, and 0.25% on funds between £250,000 and £1m.
Transferring your pension into a Sipp
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.
Defined contribution/ money purchase pensions
You are most likely to transfer into a Sipp from a defined contribution pension scheme. The pension value 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.
Defined benefit/final salary pensions
Final salary or defined benefit (DB) schemes normally offer a very attractive 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, although there has been a recent increase in transfers from defined benefit pensions.
Tax relief on Sipps
Sipps follow the same rules as other personal pensions in terms of how you can contribute to them and how you can access your pension.
You get tax relief on contributions up to 100% of your annual salary (to a maximum of £40,000 per tax year). At retirement, your cash can be taken as a lump sum, switched into pension drawdown or used to arrange an annuity.
The only similarly tax-efficient wrapper is a stocks and shares ISA, but these have an annual contribution limit of £20,000 in 2019/20 (compared to the pension tax relief limit of £40,000).
Is a Sipp right for me?
Originally designed for a narrow audience of wealthy investors, Sipps have been propelled into the mainstream thanks to changes in pension legislation in 2006 and 2015. They offer a great way to combine all your pots in one place, particularly if you’ve acquired a number of pensions through different jobs in your working life.
Their flexibility is a big selling point, but this type of pension isn’t suitable for everyone. Sipps are designed for savvy investors who have the time and knowledge to pick and monitor their own pension funds. If you’re not an experienced investor, you could come unstuck.
If you’re not sure whether a Sipp is right for you, meeting with a financial adviser to talk through your retirement goals is a good starting point.
Choosing the right Sipp provider is also important – our best and worst investment platforms guide can help.