Building up a pension pot is a priority for most of us. There are a number of ways to do it, each with their own advantages and disadvantages, and getting the right solution for your needs can make a big difference to the size of the pot you eventually retire with.
We look at SIPPs, and the factors that might make you consider them.
What is a SIPP?
A SIPP, or Self Invested Personal Pension is a DIY pension investment. Like all pensions it is tax efficient, but unlike most pensions, which simply let you pay in money to be invested by the pension company’s own fund managers, a SIPP lets you choose your own investments.
A SIPP is therefore only for those who understand investing, do the research and are happy to manage their own investment portfolio. If you make the wrong investment choices, you only have yourself to blame, so you must feel comfortable and picking your own investments.
How do SIPPs actually work?
Just like an ISA is a wrapper for investments which keeps them safe from the taxman, a SIPP acts as a wrapper for your pension investments. You can put lots of different types of investments inside your SIPP wrapper.
You can manage your SIPP online, buying and selling investments with the click and keeping an eye on how they’re doing from your laptop or even your smartphone. You invest monthly or with a lump sum, and start from scratch with money that hasn’t been held in a pension, or move it from an existing pension scheme.
What are the advantages of a SIPP?
The cost of paying fund managers can eat into your savings with conventional pension schemes. SIPPs can help avoid these costs. There are actually two types of SIPP. A Low-Cost SIPP keeps the costs to the absolute minimum, because you’re in control of them and all the decision making. They are ‘execution only’ which means you make the investment decisions, which are carried out for you.
With a Full SIPP, you will receive advice to support your investment decisions. This type of SIPP offers the widest choice of investments, but they typically come with higher charges.
It makes sense to compare the costs of SIPPs from various providers carefully. The main charges are:
- Set-up fee
- Annual management fee
- Dealing charges
Which company will be best, and present the lowest cost for you will depend on how much and how often you invest. Some provide percentage based fees with no fund dealing charges, while others offer fixed fees but charge for fund dealing.
Some pensions only have a narrow range of investment options. A SIPP lets you choose the investments that you believe can match your need for growth and appetite for risk.
If you’re new to investment, you might prefer to buy share based funds rather than individual shares, reducing your risk exposure if an individual company fails. You might want to diversify your holdings, with a range of different funds.
If you are an experienced investor, you may already have a clear idea of which funds you would like to choose.
Investments which can be held in your SIPP include
- Unit trusts and Open Ended Investment Companies (OEICs)
- Unit trusts and OEICs are the most common type of fund. They are forms of shared investments that allow you to pool your money with other people and invest in world stock markets.
- They’re ‘open ended’ which means there’s no limit to the size of the fund, units are ‘created’ or ‘destroyed’ to meet investor demand.
- Shares offer a way of owning a direct stake in a company. Their value rises and falls in line with the company’s performance and general market conditions.
- So if the company you’ve invested in is doing well, your shares in that company will be worth more. There’s often an expectation of future performance built into share prices too.
- Exchange traded funds (ETF)
- ETFs are traded on the London Stock Exchange or other European markets. A relatively recent addition to the investor’s toolbox, ETFs track the value of an index (such as the FTSE 100, or the price of gold) relatively cheaply.
- An index is simply a tool that tracks the share price of a number of companies traded on stock markets around the world. For example, the FTSE 100 tracks the 100 largest companies listed on the London Stock Exchange.
- Investment trusts
- Investment trusts are the oldest form of collective investment. Collective investments are where you invest your money alongside a group of other investors. By doing so you’re able to reduce your risk by spreading your investments more widely than would be possible if you invested in assets directly.
- Investment trusts are traded like shares on the London Stock Exchange. Unlike unit trusts, they are ‘closed ended’, so you can only buy shares from an existing investor.
- Gilts and corporate bonds
- A bond is a loan you make to a company (called a corporate bond) or government (called a gilt) to help it raise funds. In return, you’ll get a steady income from the company or government, plus the initial sum you lent it back at a fixed date.
- You can simply invest cash in your SIPP. A lot of people will do this as they get closer to retirement and want to limit their risk exposure. However, rates are often poor and typically worse than regular savings accounts. They typically vary from 0.1% up to 0.5%. If you’re going to keep money in cash, check the rate.
- Commercial property
SIPPs provide flexible retirement options.
You can take lump sums at any time after the age of 55, and an income that can vary to fit your changing needs. You could use them to buy an annuity for the rest of your life, or you could take out cash, if you want to pay off a mortgage, or take once in a lifetime cruise, for example. Or you could use your SIPP funds to pay for early retirement, and use your State Pension benefits or income from a defined benefit scheme in later life. Contributions to SIPPs are also flexible. This can be useful if you are self-employed, and need to cater for a fluctuating income.
So, should you consider a SIPP?
It is essential to seek professional advice. when it comes to your pension arrangements. To find out more about SIPPs and discuss whether one could be suitable for you, please call the Continuum team.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.