Are SIPPs worth it?
SIPPs (Self Invested Personal Pensions) are a popular alternative to traditional personal or stakeholder pensions. SIPPs offer a way of taking control of your retirement investment and if invested wisely could provide a much-improved standard of living in retirement. However, as with most investment decisions you need to do your homework to decide whether a SIPP is the right choice for you. So is a SIPP worth it?
What are SIPPs?
A SIPP is essentially a pension 'wrapper' where investment in a number of underlying investments (often funds) are held until retirement when an income or lump sum is withdrawn. A SIPP works in a similar way to a personal pension with the main difference being the range and flexibility of investment choice.
SIPPs are designed for people who want to manage their own pension either themselves or through a financial adviser. Within a SIPP you have the ability to buy and switch between funds and other investments. Therefore a SIPP is probably more suitable for someone with a medium to large pension pot and some understanding of investing. Historically the rule of thumb was that it was only worth taking out a SIPP if you had at least £100,000 in your pension pot. That was because the higher charges applied to SIPPs would be punitive for sums of money smaller than that. However, increased competition between the SIPP providers means that the cost of a typical SIPP has fallen. So now someone with £50,000 in their pension might want to consider using a SIPP.
What can I invest in within a SIPP?
Within a SIPP investments can typically be made in:
- UK Equities
- Investment Trusts
- Unit Trusts
- Commercial property
- Gilts and Bonds
Some SIPP providers may offer a wider range of investment choices than others. As a bare minimum a SIPP will offer a range of funds to invest in. Always check the range of investment choice before selecting a provider if it is important to you.
What are the costs of investing in a SIPP?
There are typically three types of costs involved in a SIPP investment.
- Admin Fee - typically an annual charge with possible additional charges for transferring in and out of your SIPP.
- Dealing Charges - these are the charges levied for dealing in funds and shares and vary from provider to provider. You need to ensure that you select a provider whose charging structure meets your requirements.
- Fund manager charges and other fees - fund managers also charge an annual fee. Some SIPP providers have negotiated a cheaper fee structure with some fund managers and have passed these reductions on to their investors. Some providers - such as Interactive Investor - offer a fixed fee model, charging a monthly fee of between £9.99 and £19.99 per month. Always check the fund platform details for full information on the charging structure before you make your final choice.
Make sure you read my article - The best & cheapest SIPPs - low cost DIY pensions, This is a 'must read' for anybody considering taking out a SIPP.
Deciding if a SIPP is right for you
The best guide I've come across for helping you decide is this FREE SIPP guide. Once you've downloaded it flick to page 7 where it will help you decide whether you should use a SIPP rather than a personal pension or stakeholder pension. Also ask yourself the following questions.
- Are you aware of the risks? - Investing in a SIPP is not without risk as any investment can go down as well as up
- Are you comfortable managing your own investments?
- Do you understand the charges involved?
- Do you understand your current pension details and benefits if you are considering transferring them?
- Are you aware of the pension rules and how they affect you? If not you can read a roundup here - Pension changes explained
If you can answer 'Yes' to the above questions then a SIPP investment may well be the right choice for you and I suggest you browse the following article - The Best & cheapest SIPPs - low cost DIY pensions.
- How much do I need to retire early?
- The Best & cheapest SIPPs - low cost DIY pensions
- Cheapest SIPP - the definitive answer
- How to transfer your pension - everything you need to know