To choose the right SIPP for a given set of circumstances is a far from straightforward exercise. There are many different options and a direct comparison can often be difficult. In this post, we attempt to cut through the mass of detail to summarise the key points to consider.
A Self Invested Personal Pension (SIPP) allows an individual to save for retirement by choosing their own set of investments including shares, and commercial property. A SIPP offers all the tax advantages of any other personal pension arrangement.
The keywords are ‘Self Invested.’ It is the responsibility of the individual (and/or their advisers) to manage their investments appropriately. A SIPP is not the right approach for everyone and it is important to consider the benefits and risks.
SIPP Benefits and Risks
The benefits of SIPP’s are:
- They are mobile (they stay with you if you move jobs).
- Their flexibility (the types of investments they will accept).
- Control (you are in complete control of your pension fund).
It is also important to consider the risks, specifically:
- What is the overall level of charges compared to your existing scheme.
- Management time/expertise. Unlike a traditional DC pension scheme, you are in charge of your investments.
- Investments can go down as well as up and mistakes can be costly.
It is important to understand any guaranteed benefits an existing pension plan may offer. If these benefits do exist their value should be weighed against the impact of potential under performance of the pension over its remaining term. Moving a frozen pension fund to a SIPP makes sense in some circumstances but not all. Personal circumstances should be considered as part of a long term plan.
There may be significant charges imposed to exit a pension scheme. These must be considered when making the comparison between a SIPP and your pension scheme.
Choosing A SIPP
The majority of investors (some estimate >80%) invest in SIPP’s via a platform (often known as supermarkets). These offer access to a wide range of investments and are a relatively simple way to manage those investments. They deliver a range of facilities including buy, sell, switching and valuation all via online portals. The choice of platform can often be just as difficult as choosing the SIPP.
The key points to consider when trying to choose the right SIPP are:
- The available investment options.
- The level of service/support available.
- The fund management including background and experience
- the overall financial strength of the provider.
What Investment Options Are Available
In principle, a SIPP can hold a wide range of investments but some SIPP’s will not hold the full range available. For example, some will not allow you to invest in shares and investment trusts directly.
Choosing the right SIPP is a comparison exercise based on all the criteria listed above. Choosing a SIPP without the full range of investments is not necessarily a problem.
Considering the range of assets available in a SIPP also gives an indication of risk. A SIPP that offers a wide range of investments is likely to be less at risk of potential financial problems than one that only invests in only a few (perhaps higher risk) investments.
Does The Service Level Match Your Requirements
We would all like a SIPP provider that provides excellent telephone support, educational programmes and seminars and personalised help and support but that all comes at a cost. For a more experienced investor why pay for what you don’t need. Alternatively, for the newer investor paying for high levels of support could be worth every penny.
There is a wide range of SIPP’s on the market. Some are provided by the major pension companies. Others are delivered by specialist, much smaller, businesses.
Choosing a SIPP from a smaller or newer player in the marketplace is not necessarily a problem. Some may have advantages over the more established players but it is important to do your homework and evaluate the risk. Smaller providers could be at risk if some of the investments held fail.
This can be the most difficult item to compare. Not all costs are transparent, it can be difficult to compare like against like and charging models may be based on a SIPP/platforms target market.
For example, one SIPP/platform may target high net worth clients and will build their cost models accordingly. This cost model may make perfect sense to the high net worth individual but make no sense at all to the smaller investor.
Any individual with the time (and inclination) to make an assessment of all available options could choose their own SIPP/Platform package. However, mistakes can be costly in terms of fees and the costs (and time) involved in moving to another SIPP/Platform if the first does not meet your needs. It is worth making an assessment of the potential for loss versus the cost of professional financial advice.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance. This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action.