The self-invested personal pension (Sipp) market has gone through an extraordinary growth phase in the past few years. In the last year alone, the number of established Sipp arrangements has increased from 150,000 to at least 250,000, and possibly a lot more.
This rapid growth has inevitably meant that some perceptions have not quite kept pace with reality, and a number of myths have sprung up. But as with all myths, there is often a kernel of substance in these misconceptions. So what I would like to do here is show how I think the market has moved on, and what this means for investors.
Myth 1) Sipps are expensive, and are only suited to wealthy investors.
A few years ago, this would have been true. Sipps used to come with fixed fees of hundreds of pounds per year. So they only really worked if you had tens of thousands of pounds in your fund, or if you were looking to save hundreds of pounds a month.
This is no longer the case. A number of Sipps are now available without any fixed fees at all, which means that they are just as efficient for investors with £50 a month to save as they are for the traditional, more wealthy investor.
Myth 2) Sipps are risky.
It is true that you can invest in high-risk assets through a Sipp, such as individual shares or traded options, so novices might think that Sipps are inherently riskier than traditional pensions. But you can pursue a conservative investment strategy in a Sipp, too - by sticking to collectives, for example, or by confining your investments to cash and bonds. That is still only half the picture, though. The reason that Sipps are actually less risky than most pensions is that they actively encourage member engagement.
The only way to really get the most out of your retirement planning is to make informed decisions about your contributions, your investment strategy, and your withdrawal options at retirement. Unlike more traditional personal pensions, Sipps are specifically designed to promote this, rather than relying on default funds and default contribution rates.
Myth 3) Sipp investors are paying for flexibility they don't need.
Again, five years ago this might have been true. There was a time when you wouldn't benefit from paying Sipp fees unless you were going to make some fairly full-on investments, such as buying a commercial property. But the world has changed. Not only can you now invest in a 'fee-free' Sipp, you can also invest in some funds at lower cost than you would through a Stakeholder pension. When we looked at this recently, we identified several tracker funds that can be bought at lower cost through a Sipp than they would be through the providers' own Stakeholder pensions.
Myth 4) The £3,600 universal pension contribution allowance has to go into a Stakeholder pension, doesn't it?
Just about anyone who is a UK resident and under the age of 75 can benefit from tax relief on pension contributions of up to £2,808 a year (£3,600 gross). However, contrary to widespread popular belief, this allowance doesn't have to go into a Stakeholder - it can also go into a Sipp.
Myth 5) Transferring into a Sipp is almost as complicated as moving house, and even less fun.
Moving a pension is cheaper and a lot less hassle than you might imagine. Some pension transfers should be supported by an adviser, but not all. If there are no penalties involved in leaving your old pension, and you are happy to choose your own investments in the new pension, then the whole transaction need be no more hassle than booking your annual holiday.
Guaranteed annuity rates, exit penalties and tax-free cash entitlement above 25 per cent may be forfeited by transferring to a Sipp. So, if you are considering transferring your pension, you should always find out what you will lose by doing so.
There may still be sound reasons for transferring a pension even if there is a cost involved. For example, if you have 20 years until retirement, a 5 per cent exit penalty may be a small price to pay to get out of a pension fund that has stopped paying annual bonuses and has little prospect of improvement.
When you move the money into a Sipp, the cost need be no worse than transferring an individual savings account - it is possible to set up a Sipp at almost zero entry cost. This applies to transfers as much as it does to new investments.
In conclusion…
Sipps can still be complicated, expensive and bewildering. They can also be simple, low cost and engaging. It is therefore important to remember that the market has evolved very fast in the past few years, and is likely to continue to do so. Pensions legislation, technology advances, employer and employee requirements and the regulatory framework will all continue to change the pensions environment.
Investors may be distracted by sweeping generalisations about the Sipp market - good or bad - that fail to reflect the subtleties of the products and services on offer. What I have tried to show here is that if you go looking, then you should be able to find one that meets your needs.
