Sipp at the cup of flexible savings

A GROWING band of investors are taking the reins of their retirement planning, and are stashing their cash into self-invested personal pensions (Sipp).

Forthcoming changes to pension rules, as well as the advent of auto-enrolment for lower-earners, will increasingly see people take control of their pension prospects, according to experts.

“These [moves] are likely to encourage people to focus on the level of contributions to pensions, how pensions are performing and what alternative options there are,” says Catherine Penny, vice president of tax-efficient investing at Barclays Stockbrokers.

“There’s a growing awareness that company pensions could well fall short and investors feel a pressing need to make supplementary arrangements if they’re to have a comfortable retirement.”

WHAT IS A SIPP?
Sipps are personal pensions, but with a wider range of investment options. They used to be the preserve of the wealthy, due to high charges, but a number of “low-cost” Sipps have emerged in the past decade.

These have given more investors access to these flexible pension wrappers. You can set up a Sipp with as little as a £50 monthly contribution, and can transfer existing pension assets in, too.

WHY MIGHT YOU WANT ONE?
There are four key reasons for transferring to a Sipp, according to a poll by Hargreaves Lansdown, the financial adviser.

These are: investment choice; consolidating old pensions under one roof; disappointing performance and service from existing pension providers; and the ability to view and manage Sipps online.

WHAT CAN YOU PUT IN A SIPP?
You can invest in everything from collective investment funds, such as unit trusts, open-ended investment companies (OEIC) and investment trusts, individual company shares, gilts and corporate bonds to exchange-traded funds (ETF) and commercial property.

Patrick Connolly, a spokesman for AWD Chase de Vere, the adviser, urges investors to make sure they aren’t paying for more freedom than they require. “Many Sipp investors invest in nothing other than collective investment funds – so are paying the extra costs of a Sipp for ‘bells and whistles’ they don’t use,” he says.
“While Sipps may offer a wider choice of funds, this approach can usually be adopted through a personal or even a stakeholder plan.”

HOW MUCH DO THEY COST?
Charges on Sipps will still typically be greater than charges on a personal pension. AWD Chase de Vere says investors generally need at least £50,000 to make a Sipp a viable option, while wealth manager Towry puts the figure at £100,000-plus.

Costs vary, so do your homework. The Vantage Sipp, from Hargreaves Lansdown, is free to set up and run, provided you buy funds that pay trail commission, but charges 0.5 per cent capped at £200 as an annual fee for those who want to hold shares, investment trusts and ETFs.

Conversely, the Sipp offered by Sippdeal, a subsidiary of AJ Bell, the broker, is good value if you hold only shares because there are no Sipp fees and dealing charges are fixed at £9.95 per online trade.

HOW HAVE THEY PERFORMED?
The biggest 20 Sipp funds have, on average, risen by 89 per cent in the past five years to December 2010 (see graphic). This compares to an average of 26 per cent return from the biggest 20 pension funds and 24 per cent from the FTSE 100 over the period, according to the Hargreaves Lansdown Sipp index. Over all 36 periods considered, Sipp funds had outperformed pension funds.

Laith Khalaf, a pensions analyst at Hargreaves, attributes this to Sipp investors selecting more risky investments and being more demanding of the people managing their money.

The biggest 20 Sipp funds hold investments across 11 sectors, including higher-risk and higher-growth areas, such as emerging markets and natural resources. Some of the funds in these sectors have posted stellar performance over the past five years.

Most of the largest 20 pension funds (representing over £100bn of assets) are “balanced managed” funds, investing more conservatively and returning less over the long term.

Khalaf says: “Pension funds can get away with less-than-dazzling performance because many investors don’t review their pensions enough, if at all.” In fact, almost half of working-age people have never reviewed their pension plan, according to research from Barings. But with big pension changes ahead, this might be the moment to take more control.