Following last month’s Brexit vote in the EU referendum, the stock markets and foreign exchange markets have been volatile. This clearly has a huge impact on the pensions of millions of Britons.
So, now that we’ve supposedly “taken back control” of our country, is it time for you to do the same with your pension?!
Self Invested Personal Pensions (SIPPs) – What Is A SIPP?
A SIPP is a Self-Invested Personal Pension, and does exactly what the name suggests. It allows the pension holder (you) to choose and manage exactly what investments are made in your pension.
It has all the tax benefits of a “standard” or company pension scheme (i.e. up to 45% tax relief on contributions and no capital gains tax or income tax to pay on your profits).
Self Invested Personal Pensions (SIPPs) – The Advantages
So, what are the benefits of investing in a SIPP. Here are just a few:
- Freedom: Traditional pension providers usually only provide a short list of funds (and sometimes ETFs) to invest it. This is run by the pension scheme’s own fund managers and hence you are usually tied into what investments are made in your pension. However, a SIPP puts that power back into your hands and lets you decide exactly where your pension is invested.
- Control Over Fees: Whilst we note below that SIPPs do charge fees, they are usually a lot more visible than within traditional pensions. For company pensions, you’ll often notice that you are charged fees on fees on fees. These can range from pension management fees, annual on-going charges, trading fees, exit fees and all other kinds of charges which in some cases can add up to around 3% per annum on your investment. For many people who are investing in a pension, this accounts for a lot of the gains made in their pension in the first place.
- Administration: By controlling all of your own pension funds in a SIPP, you know exactly where you sit financially and can avoid the large administration burden of managing many different pension schemes which employees tend to build up over a lifetime of job-hopping.
Self Invested Personal Pensions (SIPPs) – The Disadvantages
Whilst there are advantages to a SIPP, they may not actually be for everyone. If you are thinking of investing in a SIPP, here are a few things you should consider before you do:
- Annual Charges: depending on where you open your SIPP, they can be relatively expensive to maintain. That said, these have fallen somewhat over recent years. Bestinvest’s Best SIPP for example charge an annual fee of only 0.3% per annum for investments up to £250k, reducing to 0.2% per annum between £250k and £1m and 0% for anything above £1m. However, other SIPPs can charge much higher ongoing annual fees, so you should watch out for this.
- Trading Fees: some SIPPs can also charge high per-trade fees, so this is something that you definitely need so watch out for if you are thinking about actively investing your pension funds. The aforementioned Best SIPP only charge a flat £7.50 per trade, which is in line with the cheapest brokers on the market, so that is a good way around this issue.
- Exit Fees: again, some SIPPs can have very high hidden fees, usually for taking your funds back out of the SIPP after you retire. Make sure you understand all of the listed charges before signing up to any SIPP.
- Investment Choices: whilst SIPPs do generally offer a wide range of investments, generally covering all listed shares (including AIM), ETFs, investment trusts, etc, there are certain asset classes that you cannot invest in through a SIPP. The most notable of these is direct residential property investment. Therefore, if you think you’re the next big property magnate, just be clear that you can’t manage that through your SIPP.
- No Matching: if you have a straight up choice between your company pension scheme and a SIPP, you’ll find that your employer may be hesitant to match any contributions you make into a SIPP. Because of this, many individuals would lose their employer match on their pension contributions, which is usually too higher price to pay even given the advantages noted above.
Self Invested Personal Pensions (SIPPs) – The Conclusion
SIPPs may not be the right investment vehicle for everyone, and even if they are the best “pension option”, with the new lifetime ISAs and other investment options, they may not be the best place for your money in the long term.
However, in many cases, they can be much more financially fruitful than standard company pension schemes, or than simply saving in a non-tax protected savings account.
If you do opt for a SIPP, just make sure you don’t get stung by hidden charges and make sure you have a robust investment strategy for when you do take control of your own pension!