WHETHER it’s fine wine or a pension, you need to be a connoisseur to get the most from taking a sip. But while almost everyone will get some benefit from a sip of wine, the same cannot be said about self-invested personal pensions (Sipps).
Much like an investment ISA, a Sipp offers a tax-free wrap for investments chosen by the owner, often weaving together a number of company pensions and investments tied up elsewhere. They, again like investment ISAs, offer great tax advantages and are flexible in the way you invest and withdraw from them (see box below for the latest changes). You can bung almost anything into them: collective investment funds, company shares, bonds, gilts, exchange-traded funds (ETF), even commercial property. So understandably, you need to be reasonably savvy to get the most from a Sipp.
Investors also need to be able to give a reasonable amount of time and money (around £100,000) to the management of their Sipp. The level of these depends on whether you have more of the former or the latter.
Those with more time (and probably confidence) are likely to opt for a Sipp they alone manage through an online platform. Others will find paying an investment house to implement their strategy more appealing.
Management of a Sipp online is much like using a spread betting platform. There are charts, information, limit orders and your portfolio available for you to see. The cost is low because you are largely left to your own devices. The fees depend on the products you invest in, but they are broadly low cost annual payments that are little affected by the overall size of your capital. Unless you are investing in separate funds within your Sipps, that is. Providers such as Barclays Stockbrokers and Selftrade offer competitive prices and a degree of support for those interested in it.
Using an investment house requires parting with a fee of around 1.5 per cent of your pension each year in exchange for management of your pension fund. Chris Aitken, head of financial planning at Rensburg Sheppards, says that this means that you can be in control of your strategy through contact with your manager without having to constantly check your portfolio. “There is no hard and fast rule about how often you speak to your investment manager, some come in once or twice a year, others want to talk once a week.”
Working out which option is cheaper depends entirely on your investment strategy. Those keen to use a Sipp to invest in a variety of low maintenance, low cost ETFs, for example, are likely to find an online platform more cost effective. Whereas those looking to invest in a variety of actively managed funds will probably find using an investment manager cheaper. This is because actively managed funds each incur their own fee, whereas investment managers absorb all these fees into one overall fee that you pay them.
Either way, if you have the money and the time, investing in a Sipp allows you to find a mix that suits your tastes.
CHANGES FOR SIPPS
As of October 2010, you are allowed to carry forward unused allowances from the last three years.
The lifetime allowance for a Sipp will be reduced from £1.8m to £1.5m from April 2012.
CHANGES TO BE IMPLEMENTED FROM 6 APRIL 2011:
From the next tax year, Sipps will be simplified. Everyone will be entitled to receive tax relief on contributions of 100 per cent of income or £50,000 (whichever is the lesser amount).
BASIC RATE TAXPAYERS:
Receive 20 per cent tax relief inside the Sipp.
40 PER CENT TAXPAYERS:
Receive 20 per cent tax relief inside the Sipp and can claim a further 20 per cent tax relief through their tax return.
50 PER CENT TAXPAYERS:
Receive 20 per cent tax relief inside the Sipp and can claim a further 30 per cent tax relief through their tax return.