ON THE face of it, self-invested personal pensions (Sipp) appear to be the perfect way for everyone to save for the future – offering the investment trinity of value, flexibility and choice. But Sipps aren’t always and everywhere the right choice – it could pay to weigh up the pros and cons.
THE TRANSFER MARKET
There is no doubt that Sipps can be good for the more sophisticated investor. “Sipps are suitable for those that would like greater investment flexibility and choice as to how the assets of their pension are invested,” says Sarah Lord, a managing director at Killik. Also, “for individuals with existing pension assets, developed over a number of years in a variety of traditional pension policies, Sipps have been used to consolidate pension arrangements in order to take control and better develop an ongoing strategy into retirement itself,” says Murray Smith of Mattioli Wood.
Although it’s desirable to have all your pensions in one pot, in practice it might not be the best option. As Smith notes: “Older style pension arrangements can carry key benefits and attributes that are lost on transfer.” Hidden penalties and the loss of guarantees can lead to more costs than benefits. This is particularly the case for “policies with a minimum guaranteed return or annuity rate – which, in the present climate of exceptionally low gilt yields and therefore annuity rates, could be highly valuable,” according to Smith.
Andrew Roberts, chairman of the Association of Member Directed Pension Schemes (AMPS) advises that “before moving existing pensions to a Sipp you should check what you may be giving up from your existing pension arrangement – such as a guaranteed income at retirement, contributions from your employer, salary-linked pension income and of course there will be costs of moving pensions which could include a transfer penalty from your current pension provider.”
The flat fee structure offered by many Sipps is great if you have a large pot – the bigger the better. According to Smith, a bespoke Sipp which carries trustee, administrative and consultancy fees can be a very cost effective pension arrangement, particularly for larger funds where there is investment into real and direct assets. However, many funds charge an annual fee of over £500, which can be a significant chunk for the smaller pension pot. A big pension pot will also be able to soak up the transaction fees of a trigger-happy investor, which are another added cost for pensions lacking the necessary bulk.
CHOOSING NOT TO CHOOSE
Choice is freedom, and “Sipps give you total control,” as Catherine Penney at Barclays Stockbrokers says. But some investors would rather choose simplicity over yet more options. As Roberts notes: “If you don’t intend to take an active interest in investments then it may be better using a simpler pension product with lower charges and less investment fund choice.” When it comes to pensions: one size doesn’t fit all.