Setting up a SIPP
The attraction of a self-invested personal pension (SIPP) is an obvious option for those who like to really be involved in their future financial standing.
You get to be in the driving seat, able to choose from a wide choice of funds and other assets, and on top of that you get to monitor your pension’s progress and have the option to switch between investments as you see fit.
SIPPs were introduced in the 1980s, but for a long while only wealthy and knowledgeable investors could afford to use them due to high minimum entry levels and steep charges.
As with many other things in life, the advent of the internet helped lower the barriers to many investment options, with online investment sites and online fund supermarkets popping up every year.
There is now a new generation of simple, low-cost online products and services on offer, which has helped transform the SIPPs market.
More and more SIPPs providers are spending a substantial amount of time and money to make the SIPPs market more accessible.
What are the rules on SIPP investment?
SIPPs are governed by the same tax and contribution rules as other pensions – for any contributions you make to your pension fund (even if you’re not a taxpayer), the government automatically adds a further 20%, equivalent to basic-rate tax, while higher-rate taxpayers can reclaim another 20% through their self-assessment forms.
Since 6 April 2012, there have been a few changes.
Lifetime allowance: reduced to £1.5m subject to transitional ‘Fixed Protection’ arrangements. (‘Fixed Protection’ application must have been made by 5 April 2012.)
Small pension pots: where your total pensions savings do not exceed £18,000 you may take them as a lump sum, with a proportion being subject to income tax at your marginal rate.
Additionally, subject to certain conditions being met, an individual pension plan worth less than £2,000 can be paid out as a lump sum to individuals aged 60+ regardless of the overall total of their pension savings.
But any one person can only have a maximum of two lump sum payments in their lifetime. It’s always best to double check the most recent updates, if there are any, here – HMRC.
Maximum pension commencement lump sum: 25% of the lifetime allowance, currently £375,000 (£450,000 where the £1.8m LTA applies).
Protected rights: protected rights (rebates into your personal pension of monies that would have otherwise provided with the State Earnings Related Pension Scheme (SERPS) supplement to your state pension) will be treated as any other pension benefit.
Although SIPPs get the same tax treatment as any other kind of pension, they provide much greater choice in the way you may eventually want to take your retirement income.
In particular, a SIPP makes it easy to defer buying an annuity (until as late as 75), as you can leave your pension invested and simply draw down an income from it.
What are the options?
Again, as with many things in life – not all SIPPs are made equal; and there can be quite major differences in the range of asset types available.
The new breed of cheap and simple online/phone-based SIPPs are geared towards mainstream investors prepared to make their own decisions, with enough background knowledge regarding how the market works.
There are the simple ones which have access to a broad range of funds through fund supermarkets, with cash as a temporary alternative, while other SIPP providers allow both funds and shares in their SIPP.
However, some products provide a considerably wider choice.
For example, Selftrade’s SIPP allows users to invest in its full range of investments – UK and international shares, Exchange Traded Funds, Exchangen Traded Commodities, bonds & gilts, funds, warrants and covered warrants.
At the other end of the spectrum are the old-fashioned, full-service SIPPs. Full SIPPs allow you to invest for your retirement through assets traded on any recognised stock exchange worldwide, as well as structured products, derivatives and hedge funds.
They may also allow more offbeat permissible assets, such as traded endowments, gold bullion and commercial property, or even – in one or two cases – unlisted private equity.
Different investment managers may be brought in to manage different portfolios within the single pension pot. But few providers accept the full range of permitted investments, so it’s important to check if you want to hold more unusual assets.
How much will it cost?
Many online SIPPs are now very cheap. Several have no set-up fees or annual administration charges; all you’re likely to pay are the costs for online sharedealing or discounted funds.
By contrast, comprehensive SIPPs can, and often do, come at a hefty premium – expect a set-up fee of around £400 plus and annual charges of up to £800, and on top of that there can be substantial extra costs for specialist investments such as commercial property.
Are they for me?
The fact that there’s now a good choice of low-cost SIPPs online means they are accessible to most people. Even £100 a month can be enough to set up a SIPP account online, choose a couple of funds and manage it.
Nonetheless, if funds are all you want, you may be better off with a personal pension or even a stakeholder (where the choice is more limited and the fee is capped).
Some providers have turned their personal pension products into ‘hybrid SIPPs’ – adding investment choice and flexibility by offering a wide range of external as well as internal funds, again at cheaper rates than before.
The trend has become for an investor to now have a single pension provider, but having the option to not put all your money into its in-house funds.
If you have a personal pension, unlike a SIPP, you generally only pay a single-plan charge rather than paying for the purchase of each individual holding.
While this might make it difficult to know exactly what you’re paying for, they could be the preferred option if you’re not interested in holding direct equities or other more unusual investments.
Questions you need to ask yourself…
- Do you prefer the idea of a core ‘plain vanilla’ pension fund to hold for the long term and feel reluctant to mess around with more high-risk or unusual funds? If so, a stakeholder product is likely to suit you better.
- How do you feel about selecting your own SIPP funds? If you don’t like that idea, consider either using a financial adviser or sticking with the more limited investment choice of a stakeholder.
- Are you likely to check up on your portfolio performance regularly? If not, the SIPP route is probably not for you.
- How many existing pensions do you have? If you own several policies it may well make sense to pull them together within a single SIPP wrapper.
What steps do I need to take?
If you’re happy to run your own SIPP, it’s pretty simple to start off. First, decide what kind of investments you’ll want to hold in your pension.
Try and think ahead – even if you only feel comfortable with investment funds at present, there may come a day when you have more time to build a portfolio of individual shares or want to branch out into investment trusts. Also look at the charges on the SIPP you’re considering.
Once you’ve filled in the online forms and set up your account, it’s not difficult to source a steady email flow of up-to-date investment ideas and information from firms such as Dennehy Weller or Whitechurch Securities.
Another possibility is to pay a one-off fee to a fee-based independent adviser for some fund or other investment recommendations to start you off.
Alternatively, if you like the range of investments available through low-cost SIPPs but don’t have the time, interest or confidence to make your own investment decisions or monitor your portfolio, you could contact a specialist financial adviser.
This will set you back a little in fees, but could potentially be the best option in terms of helping you get to grips with the market.
How can I build a portfolio?
If you’re looking for ideas to shape your portfolio, always keep in mind how long you have to invest. The general investment advice is that – the younger you are, the more risk you can afford to take.
However the older you are, and as you approach retirement, risk should be taken off the table as it’s now harder to replace what you lose.
A moderate-risk portfolio will suit many people in their 30s and 40s. This is likely to include commodities, emerging markets and Asia Pacific funds, alongside commercial property and a strategic bond fund.
In your 50s and into your 60s, increasing exposure to more cautiously managed bond funds and to commercial property and absolute return funds is advisable.
Can I transfer my pension into a SIPP?
There are good reasons to consolidate other bits and pieces of pensions within a single SIPP wrapper. Often it is cheaper and easier to manage – and you can see at a glance how your whole pension portfolio is performing.
It’s very difficult to manage your investments efficiently when they’re scattered among several different providers, each with its own menu of funds. However, before you streamline your whole portfolio, you need to make sure you:
- Don’t give up an existing pension if it will mean losing contributions from your employer.
- Weigh up the pros and cons before transferring if you are likely to be hit by hefty penalties for closing your existing pensions.
Generally the process of bringing everything under one pot is quite straightforward.
You will be required to get in touch with your SIPP provider, this is often in writing, and instruct it to transfer into your SIPP account.
The provider will need the name and address of each existing pension provider, plus your contract reference number in each case.
It will then contact the existing providers on your behalf and request the transfer. The whole process should take no longer than a few weeks.