Freedom has been the buzzword in the pensions world for years now, after the government decided to shake up the industry back in 2015.
For many savers wanting to embrace their newfound freedom, a self-invested personal pension – or Sipp – is the perfect answer.
Rather than relying on an insurance company to make investment decisions on your behalf, the Sipp tax wrapper lets you choose exactly which HMRC-approved investments to put in your pot.
But there are a whole range of different Sipp options to choose from, so here’s some things you should consider to help you make that decision.
Are you suited to a Sipp?
First, you need to consider whether a Sipp is the right option for you. If you have little in the way of investment knowledge and a small pension pot of less than £50,000, a Sipp probably won’t be appropriate, says Patrick Connolly from Chase de Vere.
But if you fit the bill from that perspective, you need to consider the reasons why you want a Sipp over a traditional personal pension. “You’ll typically find that a Sipp has more investment options, and perhaps more flexibility, than a traditional personal pension, but a Sipp will often have higher charges,” says Connolly.
This means you need to decide whether it’s sensible to pay the higher charges on a Sipp to benefit from the extra choices. If you only want to tap the typical types of investments that you could get in a traditional scheme, it might not be worth paying the extra fees that a Sipp demands.
Consider the cost
While we are on the subject of fees, the price of the pension scheme is obviously a big factor to bear in mind because you don’t want high costs to erode your investment return.
Charlie Musson from AJ Bell points out that online Sipps can cost as little as 0.25 per cent a year, so if a wrapper charges more than that, make sure there is a good reason for paying extra.
“It might not sound like much, but if you are paying one per cent each year for a Sipp, plus your fund charges, when the same option is available for 0.75 per cent somewhere else, over 40 years this could shrink your portfolio value by almost £19,000 if you are saving £200 a month.”
Weigh up the fees and compare providers to make sure you’re getting good value for money.
Inspect the service
The next thing to consider is how much hand-holding you would like throughout the investment process.
Some Sipps are purely DIY offerings that allow the investor to self-select the shares or funds they wish to buy and hold. But many providers will offer some guidance on investment decisions, which can take the form of a recommended funds list or even ready-made portfolios, says Musson.
Of course, it’s crucial that the type of service suits your specific needs, so you might want telephone support or educational seminars, for example. If you want to manage your investments on the go, make sure the provider offers a robust mobile app.
Vince Smith-Hughes, retirement expert at Prudential, says: “administration, flexibility around contributions, the option of guarantees, and being able to easily access drawdown are very important features to many Sipp users.
“Funds that can help to smooth out the day-to-day fluctuation in values could also be useful, particularly for those taking an income.”
What’s the investment range?
Many people decide to opt for a Sipp because it allows them to tap more specialist investment options, such as commercial property and individual shares.
Find out whether the provider offers the types of underlying investments that you want, as well as a healthy range for you to choose from.
Nearly all Sipps will offer access to mainstream investments such as shares, funds, investment trusts, exchange traded funds and bonds, but Musson says it’s still worth checking before you sign up.
What’s your type?
You need to take into consideration that Sipps come in different forms.
You’ve got so-called “full Sipps”, which have the largest range of investments to choose from, and which are in turn more expensive.
Martin Tilley, director of technical services at Dentons Pension Management, says full Sipps are generally for sophisticated investors with higher value pensions.
These types of Sipps can include complex assets, such as direct ownership of commercial property, loans to unconnected third parties, unlisted private equity holdings, unregulated collective investment schemes, and even intellectual property rights.
Tilley also points out that these “non-standard assets” are often unregulated and more difficult to administer.
“Several Sipp providers have recognised that it is more expensive for them to continue to operate in this market and several have cut back the range of non-standard assets they are prepared to accept. Others will have increased fees relating to these assets.”
You’ve also got a “hybrid” Sipp, which is offered by insurance companies that expect you to allocate a wad of money to their funds. This might sound counterproductive given that many Sipp savers want complete control over their cash, but this type does come with slightly cheaper administration fees.
Low-cost, online Sipps have been making waves over recent years. This types may not have the same range of options as the other Sipps, but it makes up for that by being far cheaper.
What to be wary of
Make sure you watch out for pension scams. There are plenty of examples of Sipps being advertised with esoteric investment choices, such as off-plan offshore property with the promise of big returns, warns Smith-Hughes.
“Remember, if something looks too good to be true it probably is,” he adds.
You should tread carefully if you are selecting the investments to put in the Sipp yourself, and the retirement expert warns that there are many pitfalls to avoid falling into, suggesting most people benefit from financial advice to help get it right.
You should also look at the provider’s financial stability. “A Sipp is a long-term investment and you want to know that it’s going to be around to support you on the whole journey, so it is worth assessing the financial strength of the Sipp provider,” says Musson.
Check out its website and ensure it is open and transparent about its financial performance.
What you don’t want is to be forced to change provider because the product no longer matches you demands, or because the Sipp provider is winding up, Tilley says, pointing out that the transfer of assets to a new provider can be complex and expensive.
"Ultimately the provider should be able to accommodate the needs of the client right through to, and sometimes after, death."