Self-invested personal pensions (Sipps) appeal to investors seeking flexibility and an array of options for their retirement planning, with billions of pounds pouring into these schemes over the past two years. Yet advisers are divided on whether these sophisticated pension wrappers really are the Holy Grail for investors wanting greater control over their retirement planning. The decision on whether to opt for a Sipp over a standard personal pension rests, they say, on how wide-ranging you want your investments to be.
"For most people the average personal pension will be enough, as with these you get to choose and switch between funds when you like from a list of unit trusts and open-ended investment companies (Oeics)," says David Seaton, director of Rowanmoor Pensions.
"However, high net worth individuals putting six figure sums into their pension and wanting to buy into more esoteric investments, such as private equity, should consider a bespoke Sipp."
Unlike a stakeholder or personal pension, Sipps enable you to invest in anything. This includes shares traded on the Alternative Investment Market (Aim) and Plus Markets, as well as futures and options, and hedge funds.
They can also be used to invest in commercial property, such as offices, shops, industrial units and agricultural land. Using this option, the property can be leased, even to yourself, with the rent being paid into your Sipp.
'Since April 2006, the restricted list of permitted investments has been removed and now any investment that is deemed to be a commercial investment is allowed,' says Geoff Penrice of independent financial adviser, Bates Investment Services.
The rise of Sipps
There are around 400,000 Sipps running in the UK, adds Tom McPhail, head of pensions at IFA Hargreaves Lansdown, and this number is rising rapidly. However, the distinction between personal pensions and Sipps is becoming blurred.
"Personal pensions are increasingly evolving to look like Sipps, and over the next few years I expect the existing population of personal pensions to go into run-off as the business slowly migrates across towards the Sipp model." He adds that all the major insurers have launched a Sipp over the past few years.
The idea that Sipps are DIY pensions appeals to many people, but although investors can self-invest, they can also take advice. "And this is very similar to many personal pensions, such as the Scottish Widows plan, which allows investors to either take advice or switch between funds online and so do it themselves too," says Brian Dennehy of IFA Dennehy Weller.
It's also worth bearing in mind that not every Sipp provider offers the full range of investments, so you must choose the right one for your requirements carefully. At one end, you will find the ones linked to stockbrokers, where you can buy and sell funds and shares, while at the other, there are bespoke providers that are geared up to take any investments, including commercial property.
More regulation on the way
The Financial Services Authority (FSA) has started a review into Sipp suitability following concerns that advisers were churning clients into the relatively expensive schemes when they would not benefit from the investment options afforded to them.
With a Sipp, minimum investments may be higher than on stakeholder and personal pensions. These vary, but, for example, Standard Life requires a minimum lump sum of £10,000 or a monthly premium of £300 for its Sipp.
Of course, the flexibility offered by Sipps can also come at an increased cost, although it is tricky to be definitive on the charges involved as they vary widely between providers. Rather than having a flat charge of 1.5 per cent or less, like the stakeholder pension model, there are several charges to consider when setting up a Sipp.
"Sipp providers don't work on a percentage fee basis, offering a flat annual administration fee for doing the job, which makes them suitable for people putting higher sums into their pension," says Mr Seaton.
But first, there's a set-up charge, which averages around £300 for a £100,000 Sipp, he explains. Behind this average, however, there's a lot of variation, with charges ranging from nothing on plans from some providers to £600 or more on others - particularly those allowing the more esoteric investments, such as commercial property.
The charges minefield
Set-up costs for some more sophisticated Sipps may appear high if you do not have a large amount to invest initially, while others have low set-up charges, but may impose higher annual or dealing fees. When it comes to charges, it really depends on what you want in your Sipp. If you just want investment funds, then there are low cost Sipps available. However, you should check how restrictive the range of funds is.
Annual administration fees typically range from around £500 to £1,000. However, some Sipp providers, such as Hargreaves Lansdown, charge nothing, while others, such as E*Trade, will waive the fee when your fund is worth more than £100,000.
Other Sipps with no annual or set-up charges are offered by James Hay and Alliance Trust, which provides access to over 3,000 shares and investment trusts through its Select Sipp.
Sometimes charges can vary depending on where your money is invested. For example, on the Fidelity FundsNetwork Sipp, the annual charge is £250 if you invest in its funds, but £400 if you want to include other investments such as commercial property.
So the general rule is that the more types of investment you can choose from, the higher the cost of the Sipp. Very low-cost plans may only offer an enhanced range of funds compared to the average personal pension, plus stocks and shares, rather than the complete universe of Sipp-approved investments.
For example, Sipp deal charges a one-off fee of £100. It offers access to shares, investment trusts, warrants and covered warrants. It also offers access to nearly 2,000 unit trusts and Oeics, but none of the more unusual investments accessible with more expensive Sipps.
On the other end of the spectrum, the Freedom Sipp allows investors to choose from anything approved for Sipp investment, including shares, commercial property, warrants and covered warrants, spread betting, traded options and traded endowment policies (TEPs).
This means that charges are high. The annual charge is £890 plus VAT, and there is a set-up fee of £390 plus VAT. You will also have to pay additional administration charges for specialist investments on top of this. 'But always look at charges as a whole, taking into account all the services you receive, the flexibility of the account and what investments you wish to make,' says Mr Dennehy.
Do you need all this sophistication?
Of course, some of the wider investment options won't be of use to many investors, such as private equity and individual shares. Some of the larger pension specialists, however, offer a range of different Sipp options, so clients can choose which best suits their needs.
"If you don't need additional investment options, such as shares or property investing, then there is little point in choosing and paying for a Sipp which allows these,' stresses Mr Dennehy. 'Particularly, as with personal pensions, you benefit from very clear stakeholder-style charging structures, with no initial charges and clear annual management charges, and a wide range of funds."
However, Mr Penrice adds: "There will also be a few sophisticated clients who want true self-investment into commercial property, warrants or individual shares who can take full advantage of a full bespoke Sipp."
Remember that on top of start-up and administration fees, you pay the initial and annual management charges related to the underlying investments, alongside any dealing charges for shares you want to hold. These are broadly in line with the charges levied on shares outside a Sipp wrapper, at between £7.50 and £30 to buy and sell FTSE-listed shares.
The growth of Sipps connected to fund supermarkets has brought these charges down. For example, Fidelity FundsNetwork's Sipp accesses more than 900 funds with no initial charges, making it a clean and straightforward plan.
"Many Sipps are really personal pensions with a link to a fund supermarket that offers 'open architecture'," says Mr Penrice. "These allow the investor to have a vast range of external funds."
There are also hefty discounts on fund charges with other fund supermarket-connected Sipps, such as Hargreaves Lansdown's Vantage. This has no set-up or annual fee but does charge 0.5 per cent for share deals up to a maximum of £200 plus VAT a year, and only offers access to cash, shares, and funds. The minimum monthly contribution is £50.
'You are getting access to around 1,700 funds at no, or a very low initial charge, and an annual management charge of typically between 1 per cent and 2 per cent a year,' says Mr McPhail. 'Also, quite often when new funds are launched they are instantly available for Sipp investments, but not standard personal pensions.'
He adds that by choosing a Sipp you can also keep your options open to decide later on to branch out to other investments, such as shares, if you wish.
Mr Penrice says: "Many insurance company providers will offer a personal pension with a Sipp option - sometimes known as a deferred Sipp - so if self-investment is not needed you do not end up paying for it."
However, those who have very large funds and are willing to take a risk by placing more unusual investments in their pensions will probably be able to afford the higher charges on some Sipps. If you aren't likely to make the most of the wider range of investment choice, a standard personal or stakeholder pension may prove to be a better, more straightforward option.
Commercial property in a Sipp
With Sipps now available to the masses online via the so called E-Sipps, which usually limit investments to funds and shares, investors may have lost sight of one of the most appealing aspects of the product: the ability to invest in commercial property.
Many of the cheaper mass-market Sipps, such as the Vantage Sipp from Hargreaves Lansdown, don't offer a facility to invest in commercial property.
A rule change in 2006 caused the popularity of pension investment in commercial property to dip. Previously, Sipp investors could borrow up to 75 per cent of the value of a commercial property to fund its purchase. Since 2006, borrowing has been limited to 50 per cent of the value of the pension fund.
For example, under the old regime it was possible to purchase a £400,000 property with a Sipp fund of £100,000, but now you'll need a fund size of more than £266,000 to buy the same premises.
However, the prospect of holding a property investment whose purchase can be part-financed through borrowing against your pension fund, all in a tax-free environment, is still tempting. Some key advantages are that rental income is not taxable and there is no liability to capital gains tax when the property is sold.
Investors without sufficient funds in their Sipp can club together with others to purchase a joint share of a property.
The costs associated with commercial property can be significant - there will be fees payable when the property is purchased and brought into the Sipp, plus regular fees to manage the property.
Also bear in mind that property is an illiquid asset - you can't sell it overnight - so you have to plan early for taking retirement benefits such as tax-free cash from your Sipp. And make sure that you are comfortable with investing the majority of your pension fund in a single asset. If your retirement coincides with a property slump then you could end up in trouble.
Some industry analysts have raised eyebrows around the risk of misselling Sipps, so much so that last year the Financial Services Authority began to officially regulate these products, turning their attention to the lucrative adviser commissions offered by Sipp providers. However, Mark Andrews, managing director of Manchester-based IFA, Purplecircle Consulting, says that one needs to question whether a Sipp has indeed been missold or, in fact, misbought. He explains: 'There are some so-called 'Sipps' on the market that are represented as being Sipps, when in reality they are not. These low cost, closed hybrids are simply personal pensions with a lot of different funds.'
Mr Hutchinson agrees with this saying that some companies use the label of a Sipp to sell their own investments and hence call what is in reality a 'glorified personal pension with investment capabilities' a Sipp. He adds: 'Often a good way of determining whether a Sipp is indeed a Sipp is to ask the provider whether one can invest commercial property into it.'
However, Mr Heckingbottom questions whether misselling is really that problematic an issue. 'I don't think that this is such a big issue, provided the price of the product is reasonable and provided the investor has flexibility. If they can move out of a specific product with no penalty, then they have not really lost out as a result of going into that product. It is often the case within the financial services landscape that clients move in and out of products as their personal circumstances change.'
'For a misselling claim to work one has to prove financial loss and I cannot really see financial loss arising from the sale of a Sipp.'