popularity of self-invested personal pensions (Sipps) has risen impressively in recent years. They look like the perfect way to save for retirement – flexible, good value for money, and easy to access and control -- and they fit comfortably with the growing view that we must engage with our pension and take responsibility for our future.
But how should they be used? What should be avoided? If you’re considering opening a Sipp, which product should you choose?
BURDENS OF RESPONSIBILITY
Andrew Roberts, chairman of the Association of Member-Directed Pension Schemes, emphasises the need to “ensure you’re interested in a Sipp and its particular benefits at all. If don’t want to manage your pension, you don’t need a Sipp.”
He points to concerns from the FSA that some people are pushed into Sipps when it’s not necessarily in their best interest. Other schemes are cheaper and, if you don’t have the time or want the responsibility of making direct investment decisions, these cheaper products make better sense. Crucially, if you decide to manage your pension, ensure your interest is long-term and won’t disappear after a few months.
UNDERSTAND YOUR INVESTMENTS
Depending on provider and product, Sipps let you plough your pension savings into a huge variety of investments, from equities to commercial property. But with greater choice comes greater risk. John Moret, principal at MoretoSIPPS, warns against “investing in overseas property or in Unregulated Collective Investments”. These “need specialist knowledge.”
Roberts agrees. Just because flexibility allows, it doesn’t mean it should be done. Unless you’re a sophisticated investor, or have independent financial advice, “unusual or esoteric investments” should be avoided. He also cautions against promotional offers that appear too good to be true. “Politely decline cash inducements by Sipps providers to invest in promoted investments. These aren’t always bona fide funds.”
GREAT TAX BENEFIT – FOR NOW
Pensions currently enjoy huge tax advantages, for everybody but especially for 40p and 50p taxpayers, for contributions of up to £50,000 a year, which benefit from tax relief. Someone on £200,000 could increase their pension pot by £50,000 at a cost to themselves of just £25,000 in post-tax income. But there are fears that tax relief will be reduced, abolished or cut to a maximum of £30-40,000 per year. No wonder there has been a rush of cash in recent days. Remember: the Budget is on Wednesday.
The lifetime tax allowance is also dropping to £1.5m from 6 April. The tax charges for crossing this limit can be penal. One way to avoid breaching limits is to contribute in a regular dribble rather than in occasional lump sums, and then top up at the end of the tax year. This has the added advantage of making Sipp saving and management a habit rather than a whim.
Danny Cox, head of advice at Hargreaves Lansdown, the biggest direct consumer provider of Sipps, says the product is useful for consolidating a “hotch potch” of retirement arrangements into a single, simple manageable scheme. You can often transfer other pensions into a Sipp within a few months. But do your research before taking this step. Many pensions charge exit fees which can eat into the value of your investment. Also, there aren’t always long-term advantages to consolidation. Despite greater control, you might lose the particular benefits of existing arrangements. Final salary schemes or guaranteed income annuities, for example, give beneficiaries a confirmed, relatively safe payment over a defined period of time. By moving these investments into a Sipp, you are taking upon yourself the risk of market fluctuations.
As expected from a flexible product, Sipps can suit “absolutely any type of investor” as “you choose the functionality you want.” This, says Cox, is why it’s a “massively increasing market”. Recent downward price pressures on costs has made it viable for an increasing number of savers.
Different Sipps have different advantages. Some are not suitable for just anyone and there are always costs involved. Although Hargreaves Lansdown offers a low-cost option with no annual fee, investors face some limits as to where they can put money. The most flexible package, with the greatest control and the broadest selection of investment options, charges a £500 annual fee. Cox says it’s really only for someone with at least £250,000 to invest.
This abundance of Sipps, therefore, means you should tailor your choice to the amount of control and flexibility you can realistically manage, as well as to the size of your portfolio.