Self-Invested Personal Pensions
April 2010
The pension plan that you control.
What makes a Self-Invested Personal Pension (SIPP) different to any other personal pension? Simply this. It gives you the opportunity to control how your pension fund is invested, instead of leaving it up to the company that sold it to you.
In a typical personal pension, you make regular payments into a pension fund, and the provider, usually a life and pensions company, invests this money on your behalf. Although you may have a choice of funds and even fund managers, you ultimately have little control over exactly how, when and where this money is invested.
In a SIPP, investment management is under your direct control, or at least that of your financial adviser, allowing you to make the decisions about what to invest in, and how much.
The same rules apply to SIPPs as to all other personal pensions in terms of annual contributions – up to a maximum of £255,000 and an overall size fund of £1.8 million respectively (2010/11).
The advantages of SIPPs
Some investors looking to save money for their retirement may prefer a SIPP to a regular personal pension plan because they want a more 'hands-on' approach to their investments, and want to be actively involved in investment decisions.
SIPPs are flexible in that they normally provide access to a much wider range of investments than other personal pensions, potentially providing higher returns but with higher risks. SIPP holders can invest in both UK and overseas equities and some foreign stock exchanges – as well as unit trusts, Open-ended Investment Companies (OEICs) and commercial property and now residential property through Real Estate Investment Trusts (REITs).
As a result, SIPPs may have the potential to provide you with much higher returns than conventional personal pensions by permitting the adoption of a more aggressive investment strategy. However, you should be aware that charges may be higher too.
Disadvantages
Although people who are interested in investments may prefer SIPPs because of the control they have over their money, for others this may be an unwelcome burden. The responsibility of organising your own investments is probably more risky than letting your pension provider do it for you.
Another important factor to consider is the cost of a SIPP. Typically, a SIPP incurs set-up charges and annual management fees that are significantly greater than those associated with a normal personal pension. There are also the additional costs of getting investment advice from an independent financial adviser (IFA) to consider.
Is a SIPP right for me?
This depends on whether you think that you will be able to build a bigger pension fund through managing your own investments, as opposed to having a financial institution manage them for you. You also need to consider whether the returns you can expect will be great enough to justify the extra costs associated with SIPPs.
Currently, most people who opt for a SIPP are likely to earn a relatively higher income and can therefore afford to invest a significant amount of money each year. They are also likely to enjoy having a more hands-on approach to their investments.
The general view is that SIPPs are a solution for those committed to building up a substantial pension fund and who are able to contribute several hundred pounds every month to their pension.
How to find out more
Enter SIPPs in to your favourite search engine (UK pages only) and you will find a wealth of information on SIPPs. Be aware that the information you receive may not be entirely unbiased and you will probably need professional advice.
So talk to your independent financial adviser (IFA).
You and your money provides general information and not advice. If you are seeking advice on financial matters you should contact a qualified financial adviser. If you do not have a financial adviser and would like to contact one, you can search for one here.
