The popularity of self-invested personal pensions (Sipps) has been on a powerful upward trajectory for the past couple of years, as a growing number of investors consolidate and take control over their pension funds.
Figures from Money Management's latest survey in April 2008 show 240,000 plans in existence, compared with just 80,000 five years earlier. Hargreaves Lansdown, meanwhile, reports that total sales for its best-selling DIY Vantage Sipp were up by more than 53 per cent for the 2007-08 tax year, compared with the preceding 12 months.
But while the idea of moving your pension funds into a Sipp may appeal, identifying the most appropriate product for your needs can be daunting: the 50 providers in the market all seem to operate different charging structures and different investment choices.
This is one area where the services of an independent financial adviser (IFA) specialising in pensions can be particularly valuable. An adviser will be able to help in the choice of investments to hold within your Sipp, and advise on the most reputable, efficient and cost-efficient Sipp providers.
Whether or not you decide to use an IFA, it's worth understanding the range of options available, as Sipp providers come in several forms. At one end of the spectrum are the low-cost online providers catering mainly to individuals prepared to make their own investment choices without the help of a financial adviser. These include Hargreaves Lansdown, Sippdeal, James Hay's e-Sipp and Fidelity FundsNetwork.
Then there are the insurance companies that have traditionally offered personal and stakeholder pensions and have now widened their range to include Sipps.
Some offer what are known as hybrid Sipps, requiring clients to put a certain amount of their investment into in-house funds before they can branch out into a range of externally-managed funds.
Some insurance houses also have deferred Sipps, where the client chooses from in-house funds but has the option to move into a more flexible, wider range of investments and manage them himself at a later date - for example, once his fund is large enough. But the Financial Services Authority has expressed concern that some investors may be paying for a level of flexibility that they are not actually using, so it’s important to clarify exactly how the charges work.
Mike Horseman at IFA Cockburn Lucas in Nottingham Horseman believes that investors are generally better off with a full Sipp from an internet-oriented provider than an insurance company product. "Insurance pension providers are part of the problem for private investors, as they often operate on inefficient platforms with restricted fund choice or below average investment freedom," he warns.
‘Full’ Sipps are available from a variety of smaller or specialist Sipp providers, as well as from certain insurers, notably Standard Life. These offer a wide range of investments including the spectrum of collective funds, single company shares, bonds, cash, overseas investments, traded endowments, derivatives and, in some cases, commercial property. Typically, they will cost more than those focusing on collective funds, particularly where property is concerned.
So what should you consider when you are deciding where to put your pension? First, says John Richardson, head of technical planning at IFAs Towry Law, it’s important to identify your own attitude to risk and your investment goals. Then you can find a plan that offers access to appropriate investments.
Size of pension pot
Amanda Davidson at IFA Baigrie Davies emphasises that for many investors with under £100,000 or so in their pension fund, a low-cost 'stakeholder' pension plan may serve their needs better while they build up the resources to invest in a Sipp. The Financial Services Authority lists stakeholder pension providers on its website www.fsa.gov.uk. "But for sophisticated investors, or those whose pension funds are building up rapidly, a fund-based Sipp may make sense with as little as £50,000," she says. Online providers are the best bet in such cases.
Mr Horseman makes the point that your choice of provider is fundamentally dictated not by how much money you have to invest, but by where you want to put it.
Many people are quite happy to spread their pension investment across a range of collective funds, and leave it at that - in which case there’s little point in paying for flexibility they will not use.
"If you just want to invest in mutual funds, you might as well choose one of the cheap Sipp providers, such as AJ Bell’s Sipp Centre, where you can manage your investments online," says Mr Horseman. "You can always transfer to another provider if you become more confident and want to branch out into more esoteric assets."
Some online providers, such as Hargreaves Lansdown, offer a wider selection including single company listed shares, but not all - so if you’re thinking of using more than unit trusts you do need to check that the provider will accept them in a Sipp.
For more sophisticated investors, providers have competed to create ingenious investment schemes for their clients, such as hotel rooms via the Freedom Sipp, commercial premises via Winterthur and Suffolk Life and share options via Origen's Sipp.
As a general rule, you’ll pay more for more sophisticated Sipp wrappers. Depending on where you’re investing and what in, they can involve several sets of costs along the way, including establishment fees, annual management charges, share dealing charges (which can be particularly significant if you intend to trade regularly), unit and investment trust charges, fees for advice, and one-off costs for specialist investments such as property purchase. There may also be fees to transfer to another pension scheme and to convert the fund into an annuity.
According to research from data analysts Defaqto into Sipps set up by IFAs, the set-up fee has fallen from above £300 to below £250 on average over the past two highly competitive years. In contrast, the annual management charge has tended to rise slightly. It now averages over £400 even for a small (£50,000) portfolio. But it can vary considerably between providers.
The cheapest Sipps are online, where several providers make no initial charge and in some cases no annual fee either. For example, Bestinvest's Sipp (which is available for sums over £50,000 and offers only unit trusts and oeics) involves no set up or annual charge for the wrapper, and the only charge levied on the underlying fund holdings is the intermediary's annual 0.5 per cent trail commission. Bestinvest is unusual in that it also offers advice at no additional charge, with the option of a discretionary management service for portfolios above £250,000.
If you want a wider range of investments, Hargreaves Lansdown charges no initial wrapper fee and no annual fee if you stick to the large number of investments where the broker earns trail commission. If you invest in any others (individual equities, for example) the annual fee payable is capped at £200. Sharedealing charges, which start at £9.95, are also competitive.
Ms Davidson warns that charges may be quite difficult to compare between providers, as some charge a flat fee but others use a percentage of the sum invested. "At least make sure you understand how the charging structure works," she stresses.
"A Sipp is actually a service rather than a product, and a key issue is the quality of administration," says Mr Horseman. "If the pension administration goes wrong, it can be a real nightmare."
Davidson agrees: "Quality of service is really important; for example, if you want to switch a fund, will your provider do it instantly or will it take 10 days? These days it should be possible to switch within the day - but it doesn’t necessarily happen, and investors could really feel the effects if they’re out of the market for any length of time in volatile conditions."
The trouble is that it can be quite difficult to make any kind of assessment of a provider’s efficiency until you’ve signed up with them. "Don’t be frightened to ask for referrals," suggests Horseman. "That’s certainly what IFAs do, and the fact is that if someone has had a good experience with a particular provider they will pass the news on."
Pension provider recommendations
£50,000 PENSION FUND: Good value Sipp for collective funds
Amanda Davidson, Baigrie Davies: "The Standard Life Sipp covers the whole of the fund market and I would use that. The Sipp Centre is also worth looking at."
Mike Horseman, Cockburn Lucas: "Investors doing it themselves without an IFA might consider the Hargreaves Lansdown Vantage product, which has minimal dealing costs and online access, but it’s not IFA-friendly as HL does not pay trail commission on investments. For investors being guided by an IFA, the Sipp Centre offers a straightforward internet-based Sipp, which I think is the obvious choice if you want a fund portfolio. I use it for my own Sipp."
Geoff Penrice, Bates Investments: "We'd use the Standard Life, which is very cheap, particularly if you use its own funds."
Standard Life - set up fees £0-£302, annual management fees up to £416.
HL Vantage - no set up fees, no annual management charge on over 1,700 funds (max £200 on other funds).
Sipp Centre - set up fees £120, annual management charge £120.
£500,000 PENSION FUND: Good value Sipp involving commercial property and gold
Amanda Davidson: "Standard Life are also able to deal with commercial property in Sipps, though I haven’t used them for this and there may be other providers with more experience."
Mike Horseman: "I’d use Hornbuckle Mitchell - it is a local East Midlands firm, but it has an increasingly national reputation. Suffolk Life also has a very good name for specialist property Sipps."
Geoff Penrice: "For a full Sipp we like Standard Life again. For flexibility, one contender is the pension consultancy Mattioli Woods, which offers a whole range of products that normal providers don’t generally have access to. But costs are higher."
Standard Life - additional charge for commercial property £650
Hornbuckle Mitchell - set up fees circa £700; annual management charge circa £400.
Cockburn Lucas: www.cockburnlucas.co.uk
Baigrie Davies: www.baigriedavies.co.uk
Towry Law: www.towrylaw.com
Hargreaves Lansdown: www.h-l.co.uk
Standard Life: www.standardlife.co.uk
Sipp Centre: www.sippcentre.co.uk
Suffolk Life: www.suffolklife.co.uk
www.unbiased.co.uk is a useful site if you want to find an IFA specialising in pensions.