What is a SIPP and how to do they work?
A Self-Invested Personal Pension (SIPPs) is a type of pension “wrapper”. It essentially allows you to build a pot for your retirement in much the same way as a personal pension.
SIPPs have become a popular alternative to your traditional personal or stakeholder pension, but why?
Are they better? Self invested personal pensions Money Helper Many people are under the impression that a SIPP would provide better returns than a personal pension, but how true is that? SIPPs certainly sound sexier than personal pensions, but what’s the best option for you?
SIPP v personal pensions
A SIPP is a type of personal pension that offers more investment options. This and the way they charge are the two main differences. There is also a third consideration which is whether your employer would be willing or able to contribute to your SIPP, as not all SIPPs would allow employer contributions.
How are SIPPs different?
From an investment perspective, most modern personal pensions offer a wide range of investment funds to choose from and this should be adequate for most people. Some workplace stakeholder pensions however, do have a narrower range of funds available than personal pensions.
This is primarily to ensure that they remain cheap and accessible for inexperienced investors who would typically need to join quickly without the need for financial advice.
SIPPs however offer a much wider range of investment options, including individual company shares from the UK and abroad, collective investments such as open-ended investment companies (OEICS) and unit trusts, commercial property and investment trusts.
The more experienced investor who wanted more control over their finances may find the SIPP the better option. The SIPP investor would be able to use their SIPP to shelter any investment gains from tax.
Are SIPPs more expensive than personal pensions?
The added complexity of a SIPP means you’d almost certainly need a financial adviser to help you manage it.
This would be an added cost and one would need to weigh up the cost benefit of that. Charges imposed on SIPP investments tend to be higher that those of personal pensions, however some SIPPs charge a fixed annual fee as opposed to a percentage of your pot, which could be beneficial for those with larger pots.
What would happen if your personal pension or SIPP company went bust? Well, the Financial Services Compensation Scheme (FSCS) would step in.
Personal pensions that are run by life insurance companies would normally cover up to 100% of the value of your pension pot if the pension company went bust. A SIPP provider, on the other hand, would be covered up to £85,000 per pension scheme member.
This is an important differentiator and one worth checking before you took the plunge one way or another.
Are SIPPs better than personal pensions?
Frustratingly, there’s no simple answer. The more experienced investor looking to invest in interesting or esoteric assets such as commercial property, individual shares and commodities such as gold and silver may prefer the SIPP route.
Anyone who simply wanted to plan for their retirement in as simple a way as possible may be better off with a personal pension.
The good thing is that SIPPs and personal pensions are easily transferred from one to the other, although it’s more popular to transfer a personal pension to a SIPP than the other way round.
From a tax perspective, there is little to chose between the two – SIPPs work in exactly the same way as a personal pension. They are also flexible enough to receive lump sums, regular contributions and sometimes, employer contributions.
The worst case (and sadly quite common) is the investor who liked the sound of a SIPP and bought one, paying for the privilege without using any of the many options available. We see this every day and it’s a complete waste of money. Don’t fall into that trap.