SIPPs

A Self-Invested Personal Pension, or SIPP, is an upmarket form of a personal pension plan that offers savers a number of attractive features such as increased control and flexibility of their pension fund and its investments.

Introduced in 1989, SIPPS were aimed at wealthier individuals, i.e. those with pension funds over £200,000.

However, increasing competition and changes in legislation over the years has brought charges down and made them more accessible to clients with lower fund values.

Benefits of a SIPP pension

SIPP pensions have a number of advantages over more basic personal pension plans.

One of the major benefits is the greater amount of control and flexibility they offer. Savers are given the option of choosing and managing their own investments with the help of an independent financial adviser.

Unlike conventional pension schemes, SIPPs offer an extensive range of investment options (there are many types of financial asset can be invested in a SIPP). They also provide investors with tax-efficient savings for when they retire, and offer a greater choice of pension benefits for their dependents or spouse when they die.

In addition, a person who takes out a pension scheme with an insurance company who have badly performing funds will be charged a fee to close that scheme and switch to another company.  However, with a SIPP contributions can simply be redirected to a better performing fund.

SIPPs have the same tax benefits as a standard personal pension, as long as the investment is on the approved list issued by the Inland Revenue.

As with any other personal pension, a SIPP is subject to the same contribution limits, but it does allow you to defer buying an annuity upon retirement.

It allows you to draw down an annual income, whilst at the same time retaining an investment fund.

Consolidation - Pension transfer

Another major advantage of a SIPP is that it allows people to transfer any existing pension schemes and investments they may have into one pension fund. This is why a SIPP is sometimes referred to as a pension wrap or wrapper.

By consolidating their retirement savings in one place, savers can benefit from easier management of their investment portfolio and reduce the charges associated with their other pension plans. There are also companies who provide improved terms for larger pension fund investments.

Before any transfers are carried out, it is important for people to check whether there are any valuable benefits in the existing schemes that would be lost on transfer. The costs of transferring must also be taken into consideration.

SIPP costs

With SIPP pensions, there are two main charges involved – a set-up fee and an annual administration fee.

Set-up fees are typically between £200 to £400, while the annual administration fee usually ranges between £300 and £600.

These charges are usually made clear when applying. Customers who set up a SIPP with a limited range of options such as shares, funds and cash, may find that no set-up fee is required, only a modest annual fee.

Other possible charges include:

• Transfer charges - the cost of moving funds from other pensions into a SIPP
• Dealing charges - cost of buying and selling investments (other than property) within a SIPP.
• Exit charges - cost of transferring a SIPP elsewhere
• Property purchase - pension trustees charge for their services when buying a commercial property, in addition to usual legal and surveyors fees.
• Fees for additional advice or expertise - an independent company/financial adviser can charge the equivalent of between 0.5% and 1% per year of the value of the pension fund for providing expertise in managing a SIPP and its investments.

Is a SIPP right for me?

Deciding on whether a SIPP is a more suitable option than other forms of personal pensions can be tricky. It's always a good idea to talk to a pension adviser first as they will analyse your circumstances and take into account their investment risk profile.

But in short, SIPPS are generally more suitable for investors who:

• want flexibility and control of their pension fund
• wish to invest in a wider range of investment options
• wish to consolidate all retirement funds and investments under one pension wrapper
• want more flexibility on drawing out an income from their pension pot 
• have specific investment ideas - plans that cannot be met through investing in an insurance company pension fund
• understand the potentially higher level of investment risk
• understand the charges that can potentially be higher than investing into an alternative such as a personal pension

A SIPP may also be a suitable choice for people who are self-employed or those who do not have access to a pension scheme through their current employer.