Want to save for retirement? Fed up (or put off) by the high charges and poor performance of many of the traditional personal pensions out there?
Sipps: Can choosing your own pension investments lead to a happy retirement?A Sipp may be right for you. Here, we guide you through the market so you can find the very best deal about. This guide is updated on a regular basis to help you make a genuinely informed choice.
Background: What is a Sipp?
Sipps – or Self-Invested Personal Pensions to give them their full name – are DIY pension schemes where investors can choose their own investments.
Originally created 20-odd years ago to cater for extremely wealthy savers, a new no-frills version is revolutionising personal pensions.
Simple and inexpensive, the 'low-cost' Sipp has opened the market to middle-income investors looking to boost returns by going it alone.
- Why low-cost Sipps are the 'future' of pension saving
How does a Sipp work?
Low-cost Sipps work are almost identical to the fund supermarkets used by Isa investors. In fact, the only difference is a pension tax 'wrapper' that means you don't pay income tax on contributions. For higher rate taxpayers on a rate of 40% or even 50%, this is very beneficial.
As with all pensions, the money cannot be withdrawn until age 55.
Is a Sipp right for me?
If you already have a fairly substantial investment Isa saver the short answer is probably 'yes', and especially if you're a higher-rate taxpayer. It's a less clear-cut issue if you only pay basic-rate tax, as your money is tied up for so long. A company pension may hold greater benefits, such as contributions from your employer.
On thing to watch out for is that Sipps come in very different shapes and sizes - from low cost to hybrid to bespoke - and with confusing charging structures.
Low-cost Sipps will suit the vast majority of pension savers. You'll have access to thousands of funds at reduced charges. It's then just a case of picking the right ones.
The key question to ask yourself is this: Am I prepared to do the homework and regularly monitor my investments? Am I comfortable to live and die by my own investment decisions? If you can say yes to both, then you're doing the right thing.
Bespoke Sipps are for wealthy savers. They have higher charges because they allow a full range of HMRC-permissible investments, such as unlisted and commercial property. Hybrid Sipps fall somewhere inbetween. Read our story about spotting the differences between Sipps.
If want greater investment choice or you're unsure, we recommend you speak to an independent financial adviser. Find a well-qualified pensions adviser near you.
Top tips to find the cheapest Sipp
If you're confident enough to go it alone - and you have the funds to play with - then follow our guide to low-end plans where the provider does not offer advice. These are the questions you need to ask...
1. What is the set-up fee? It's typically anything from nothing to £500.
2. What is the Sipp annual management fee? This is a small percentage applied every year that will eat away at your returns. More commonly, it is a flat fee. You should aim to find a fee-free plan.
3. How much are annual fees on the funds? These are the ongoing charges applied to funds that you put into your Sipp, typically 1.5% a year. A decent provider should be able to slice off some of this charge.
4. How much are initial charges on funds - Oeics and unit trusts? These fees are typically 5% but a decent provider should be able to discount these to nothing. Check the discounts on the actual funds you're planning to buy by using providers' websites. As a rule of thumb, compare the discounts with This is Money's fund supermarket.
5. How much are dealing charges on shares and investment trusts?
6. How much are the transfer fees? These are charges applied for moving money, funds or shares into a Sipp from another provider. Also, check if there any exit fees on moving to another pension provider. These can range into the hundreds of pounds with some providers.
7. What rate of interest will I get? Interest rates on cash left in a Sipp vary from 0.1% up to 4.5% (at least they did when the bank rate was much higher). If you expect to keep some of your pension in cash, check what the rate is. For example, Fidelity currently pays one basis point below the UK bank rate.
8. What are the other charges? Look out for the costs of buying an annuity, costs for paying out on death, etc. Remember that these one-off fees are less important than finding Sipps with cheap annual fees.
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Leading low-cost Sipp providers
The best rule of thumb is to start with Sipp providers who do not charge a set-up fee. These include:
- Hargreaves Lansdown Vantage Sipp Minimum transfer of £5,000 and a minimum investment of £50 a month or £1,000 lump sum.
- James Hay eSipp No minimum transfer or investment but there is a £50 transfer-in fee.
- Sippdeal.co.uk (AJ Bell) Free transfers in with no minimum investment and no contribution charge. Online dealing at £9.95
- Alliance Trust Select Sipp No minimum transfer but the minimum investment is £50. Transferring in is £50 (plus VAT) and there is an annual admin charge of £125.
- Bestinvest Select Sipp Free to transfer in. Extra 0.5% loyalty bonus on some funds and share dealing at £7.50 if you have over £50,000 in the account.
This is Money says:
Picking a winner is a hard call, because each providers listed above has benefits and drawbacks - each pension saver's needs will dictate the right choice for them. It's really important to do your own research and sums to see which fits the bill.
Overall, we think Hargreaves Lansdown Vantage Sipp is highly competitive, particularly for those just invested in funds (unit trusts and Oeics). It's the most popular low-cost Sipp at the moment, and not least because Hargreaves offers a wealth of regular fund tips and information to its customers - real added value free of charge. It carries no set-up fee and no annual charge for providing the Sipp wrapper around mainstream funds. It also enables you to buy those funds with most or all of the initial charges waived.
However, it does levy an annual charge of 0.5% plus VAT on other investments, such as individual shares and gilts, capped at £200 plus VAT a year. Share dealing fees range from £9.95 to £29.95. So HL may not be best for heavy stock market traders. Share dealing with the Alliance Trust Sipp, for example, costs a flat £12.50 and only the flat annual fee for the plan (£125). It's therefore a good choice for share traders, but it is also best value for investors with substantial fund portfolios who don't plan on making regular changes or contributions.* So it may suit someone consolidating a number of different pension plans into one Sipp. But it comes with hefty fees for switching out and a £125 annual admin charge.
Sippdeal is a strong contender on a pure share-trading front, charging £9.95 per deal. This includes ETFs and investment trusts, which work just like shares.
But perhaps the most versatile deal is on offer at Bestinvest. Well-known for its Isa offering, Bestinvest combines a £7.50 share dealing charge with heavy discounts on 1,700 funds and a 0.5% rebate on some. You need to have £50,000 in your account to make it worthwhile, plus there's a £100 annual admin fee. It's our pick for the best of both worlds.
Newly-launched Commfreefunds.com is a window into the future. It aims to offer a Sipp in 2012 in collaboration with Cofunds. Like it's fund supermarket offering (available now), it would rebate all charges for a set annual fee. This could provoke other providers to cut their fees. Below is a rough guide to which provider is best for what...
• Best for... fund investing
Hargreaves Lansdown – No initial charge and often zero or very low Annual Management Charge (AMC) over 2,000 funds.
• Best for... trading shares
Sippdeal - £9.95 for each trade is a very competitive rate.
• Best for... infrequent fund/share trades
Alliance Trust has ultra-low fund charges*, meaning an investor with a £100,000 portfolio could get a £500 bonus compared to its rivals. Instead, Alliance Trust charges £12.50 on each trade – much like a share-dealing account.
• Best for... all around offering
Bestinvest Once you've got £50,000 to play with, Bestinvest charges £7.50 for share trades and pays up to 0.5% loyalty bonus on many already discounted funds.
• Best for... cash deposits
Fair Investment Company offers market-leading rates on cash deposits. This will help those nearer retirement downgrading their risk. [Read more]
* Alliance Trust's offers a unique fund rebate structure. Fund managers pass some of the commission (the bit normally used topay financial advisers) back to fund supermarkets or low-cost Sipp providers. Usually, providers keep this rebate. Alliance Trust, though, hands this straight to its customers. It is often between 0.75% and 0.5% of the fund size - which is a hefty amount on big pension pots. Instead, it charges a one-off transaction fee of £12.50 on each fund purchase – much like a standard share-dealing account. The upshot is that if you make lots of changes to your fund choices, it'll be quite expensive. But if you just leave them to sit and grow, you'll be saving a good deal in commission every year. Equally, if your pot has grown to a large size, you'll be quids in with Alliance Trust.
›› Order free brochures on Sipp plans
* Investment trusts vs Oeics and unit trusts
Warning: The Sipps market is constantly changing, as do the issues affecting your pension pot. Get updates with our weekly newsletter...
Updated February 2011 by Dan Hyde