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All the SIPPs Advice You Will Ever Need

Richard Beardsworth Pension Expert

By Richard Beardsworth.

Independent Financial Advisor

More Reading on Self Invested Personal Pensions...

Among than many pension options available to UK workers is the self-invested personal pension (SIPP). As the name suggests, it is a personal pension scheme that is directed almost entirely by the pension saver rather than an administrator or financial advisor. Not that the investor cannot utilise the experience and advice of administrators and advisers, but all decisions regarding the pension fund ultimately belong to the investor.

The Money Advice Service refers to SIPPs as pension 'wrappers' that hold investments in place until you are ready to retire. While that explanation is technically correct, it is a bit oversimplified. We believe a better illustration is that of the SIPP being a protected account that offers a safe environment under which the investor can put his/her money to work through various opportunities. It is a protected account inasmuch as it offers the same tax protections as any other kind of personal pension.

SIPP Pensions Are Active PensionsWe also refer to SIPP pensions as 'active' pensions because they require the investor to materially participate in his or her fund. While the investor can get SIPPs advice from a variety of channels, he or she decides where and how investment money is used. The investor can choose one of two basic options for administration:

  • Assisted – Some SIPP investors prefer to take advantage of the assistance of pension administrators. This assistance is manifested in various ways including investment advice, doing research on behalf of the investor, and helping to establish and maintain investment goals.
  • Unassisted – Managing a SIPP unassisted means the investor is only utilising the services of the administrator to conduct transactions on his/her behalf. This is necessary because the investor is not licenced to do so. Above and beyond conducting transactions, the administrator provides no material assistance to the investor.

By contrast, state pensions and workplace pensions are typically inactive. A state pension is completely inactive inasmuch as the worker has absolutely no control over anything. He or she pays National Insurance contributions during a working career and then collects payments in retirement. As for the workplace pension, the worker has limited input in choosing from a list of investments offered by the plan in which he or she is enrolled.

The SIPP is markedly different in that it does not allow the investor who wants to realise maximum return on investment to simply contribute and forget about it. Maximising earnings requires active participation throughout the life of the pension.

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Choosing a SIPP Pension

The most important SIPPs advice anyone can give you is that you take your time in choosing a pension scheme. There are many providers offering various schemes with different fee and rate structures. The fees and charges you pay over the life of your pension will directly affect how much your pot is eventually worth. Moreover, make no mistake; fees and charges can be very different from one provider to the next.

For example, you may come across a well-known SIPP provider charging an annual fee of 0.2% on a £100,000 fund. That would equate to an annual charge of £196. Another provider could offer a similar SIPP with a fee of 0.43%, resulting in a £429 annual fee on £100,000 fund.

The first fund not only costs less than half in terms of annual administrative fees, but the money saved is money that is invested for greater returns. Simply put, you have less money in your fund to invest with every pound you pay in fees and administrative charges. Keep that in mind when choosing a SIPP scheme.

Other things you need to consider include:

  • history of the provider
  • available investment options
  • early exit fees and charges.

SIPP Investment Options are Key

One of the primary reasons for investing in a SIPP as opposed to a stakeholder pension or another form of personal pension is to take advantage of a wider range of investment options. As the Pensions Advisory Service explains, SIPPs are contract-based schemes that offer investment options not available to other types of pensions. For example, investing in a SIPP would give you access to:

  • listed stocks and shares (both UK and overseas)
  • unlisted shares
  • collective investments
  • investment trusts
  • commercial land insurance bonds
  • property and property funds.

The inclusion of property and property funds a few years back has made a real difference in SIPP investing. Prior to the rule changes, most SIPPs advice indicated investors should avoid both commercial and residential property. That has since changed. You can now use the money in a SIPP to invest in an extensive list of property opportunities.

Keep in mind that the wider list of investment opportunities also opens you to a greater degree of risk. Therein is the major concern of the SIPP. As an investor, you will ultimately make the decisions about how your money will be invested. This makes it crucial that decisions are not made recklessly. Investors need to take the time to research, ask questions, and then do more research. Moreover, the more SIPPs advice you seek, the better off you will be.

Reasons for Investing in a SIPP

Now that you are familiar with the basics of how SIPPs work, the last thing to consider is why you might want to invest in one. The fact is you do have other options. SIPP investing is not right for everyone. Having said that, one of the following may indicate a SIPP is right for you:

  • Self-Employed – Your average self-employed individual does not have access to a workplace pension. That leaves the self-employed person with the option of a stakeholder pension, a SIPP, or some other type of investment programme as laid out by a financial advisor. SIPPs will be the strongest option in many cases.
  • Supplementation – You may already participate in a workplace pension that seems to be doing fairly well. At the same time, you have extra disposable income you want to put toward retirement. Rather than directing that extra income to your workplace pension, you might consider a SIPP.
  • Under Performance – There are times when workplace pensions just do not perform up to expectations. If that is the case for you, a possible solution is to opt out of your workplace plan and direct the money to a SIPP instead.
  • Consolidation – The person who changes jobs numerous times during his or her career may have several inactive pensions from previous employers. Those pensions may still grow if investments are performing well, but their growth will be limited due to the fact that contributions are no longer being made. Consolidating all of them into a single SIPP increases earning power by creating a larger pot and adding additional contributions.

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You should note that pension reform affords SIPPs the same flexibility as other personal pensions. Beginning at age 55, you can access SIPP funds for a variety of purposes. Take a full or partial lump sum, enter into a drawdown agreement, or simply transfer your current SIPP into a new plan that you believe is more attractive. You have all the same flexibility along with the minimum tax liabilities afforded other kinds of personal pensions.

If you are considering investing in a personal pension, we urge you to get some sound SIPPs advice as part of your research. A SIPP may be just what you need to help you reach your retirement goals, ensuring you are able to enjoy the kind of lifestyle you are hoping for after you finish working. If it turns out that the advice does not favour SIPPs, you always have other kinds of personal pensions from which to choose.

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