Should I invest via a full-service Sipp?

There are a number of different self-invested personal pensions (Sipps) available, but these vary in terms of what they enable you to invest in and how you can withdraw from them.

Cheaper Sipps, such as those offered by investment platforms, typically allow you to invest in a wide variety of open-ended funds, investment trusts, exchange traded funds (ETFs) and in some cases direct share holdings. As an example, Hargreaves Lansdown charges 0.45 per cent of the value of funds held in its Sipp up to a value of £250,000, 0.25 per cent on the value of funds between £250,000 and £1m, 0.1 per cent on the value of funds between £1m and £2m, and doesn’t charge on values over £2m. For listed securities such as investment trusts, ETFs and direct shareholdings held within its Sipp, it charges 0.45 per cent of their value a year but caps this at £200. Hargreaves Lansdown does not charge for fund trades but does charge between £5.95 and £11.95 per trade of listed securities, and there are no fees for setting up the Sipp or drawdown.

More expensive Sipps, generally referred to as full service Sipps, allow you to invest in conventional assets such as those mentioned above, as well as a wider range of offerings including commercial property, unquoted companies, derivatives and physical commodities. Providers that offer full service Sipps include Barnett Waddingham, Curtis Banks, Dentons Pensions, Embark and Killik & Co. But full service Sipps do not necessarily allow the full range of pension investments permissible under the law, so it is important to check that a plan allows what you want to hold before taking it out.

For example, the Barnett Waddingham Flexible Sipp does not enable you to hold unlisted securities or physical commodities other than investment grade gold. Curtis Banks, by contrast, does allow you to hold UK-based company shares that are not listed on a stock exchange, providing they have at least 12 months of trading history or financial reports. It also enables you to hold gold bullion as well non-physical gold traded through an online platform.

And while the Barnett Waddingham Flexible Sipp enables you to hold some overseas as well as UK commercial property, the likes of Curtis Banks and Dentons do not.

Full service Sipps also tend to allow you to withdraw from them in a greater variety of ways. The downside of this flexibility is that it comes at a cost.

For example, from 1 June the Barnett Waddingham Flexible Sipp will charge an annual administration fee of £265, and has establishment fees of between £100 and £400. It charges £200 to set up flexi-access drawdown, and £125 a year for monthly or quarterly regular drawdown, and £75 for annual and one-off income payments.

There are further charges for holding and managing property. For example, from June this year the Barnett Waddingham Flexible Sipp will charge a property purchase fee of at least £800 and annual fee per property of £200. If you hold commercial property in a Sipp the various property and administration charges could add up to £3,000 or more a year, according to Tom Mayne, wealth management consultant at Mattioli Woods. However, if the value of the Sipp is fairly substantial, the proportionate cost of these charges are lower. There could be cost benefits in terms of the tax savings you make by holding the property in a pension, and property held outside pensions may also incur administration costs.

See Picking a low cost Sipp provider for a round up of Sipp provider charges.

The extra costs mean that you should probably not invest in a full service Sipp unless you are looking to hold commercial property or esoteric investments, and then only if your Sipp is worth hundreds of thousands of pounds so that the extra costs are not too great relative to its size.

For most investors, securities such as funds and direct equity holdings are sufficient for growing their pensions to a large enough size to be able to provide them with retirement income. While the prospect of holding unquoted companies may seem exciting, these are high risk and are not necessarily going to grow more than securities such as funds and shares. You can also get exposure to assets such as private equity and commercial property via investment trusts. With these, you can invest in just a few shares rather than whole properties or whole companies.

When you need full service

If you own your business premises, for example, a surgery, solicitor's office or factory, holding it in your Sipp could be more tax efficient. If you sell a property held in a Sipp it will not incur capital gains tax.

The value of your Sipp can be passed onto your heirs outside of your estate for inheritance tax purposes. So it could be an efficient way to leave a business asset to your family.

If your Sipp owns your work premises, you pay rent to your pensions for using it rather than to a third party. You could continue to lease the property to your company, even after you have retired or have sold it, and the rent could contribute to your retirement income. Your pension would not pay income tax on the rent it receives. 

See How to hold commercial property in your Sipp (IC, 06.12.19) for more on the benefits, risks and costs of holding commercial property in your Sipp.

But there are strict rules about what types of commercial property you can hold in your Sipp, and what you can and can’t do with them. For example, you cannot hold holiday lets, and residential properties which have no connection with adjacent or nearby business premises also owned by the Sipp. If your Sipp does not comply with these rules you could end up having to pay a high tax charge. See What are the rules on holding property in your Sipp? (IC, 28.05.21).

You could also consider holding unquoted shares as this could be more tax efficient than holding them outside a tax wrapper.