Self invested personal pensions – or Sipps - provide a tax-efficient wrapper that allows savers to choose a combination of pretty much whatever investments they want.

Whereas a stakeholder pension only gives you access to a handful or two-dozen managed or passively managed funds, a Sipp can offer a huge amount, with literally thousands of options.

Pure forms of the scheme offer an impressive range of investments from investment funds (unit trusts, OEICs, hedge funds and private equity) to stocks, shares and warrants on the major stock exchanges.

But it doesn’t end there. AIM and PLUS-listed shares and unquoted shares; bonds, gilts, futures, options and derivatives; building society permanent interest bearing shares (PIBs); commercial property and collective property funds can all be accommodated.

While, only a few years ago they were regarded as an upmarket niche, Sipps are proving popular across the breadth of the retirement-planning populace.

Suffolk Life's director of marketing John Moret, who helped lawmakers sketch out the design for Sipps in the late 80s has observed that 'there is a growing number of individuals who prefer to have more control over their pension, and some just think they can do better than investment managers.'

A popular pension The demand for control means Sipps are an increasingly popular choice. Moret calculates that the market has grown by an average of 35 per cent in each of the past five years to around 700,000 Sipps, worth a combined £82.8 billion.

'I reckon there will be a million by 2015, worth over £1 billion,' he adds. Their popularity is down to the sheer variety and flexibility on offer, which makes them a useful tool, as Moret explains:

'Sipps tend to be used as a consolidation vehicle, with people bringing together their previous pension entitlements – one customer of ours, for example, had 23 different pensions built up over the years. Sipps also have a clear advantage in terms of investors understanding what's going on.

Having everything in one wrapper means its easier to implement a pension strategy across a whole range of investments.'

For Alistair Hardie, head of Standard Life Sipps, it can boil down to whether or not you have the confidence and interest to make this flexibility worthwhile.

'A normal person wants to pay their money in, get tax reliefs and so on. The limited choice of fund you get if it's a stakeholder or traditional pension might be fine for most people, but many others will want to have a wider choice.

‘For example back in 2008 with the credit crunch people wanted to put their money into cash deposits, but with a stakeholder you couldn't, but if you had a Sipp you could.

There's also the ability to put your commercial property – if you're a firm of accountants or vets, for instance – into the Sipp and the rental income will then get paid into the pension pot and the property is free from capital gains tax.'

You could even 'put all of it in Northern Rock shares', as one expert suggests, tongue pressed firmly in cheek.

Advice advised
With such maverick stratagems in mind, it is useful to note the role of the adviser is just as important. It is widely acknowledged that the term 'self-invested' is in this case somewhat of a misnomer, as it implies that everyone is making all the decisions themselves, which is decidedly not the case.

The vast majority of those with full Sipps are not really self-invested but done through an independent financial adviser (IFA) or discretionary investment manager. 'If depends if you're a do-it-yourself person or not,' says Hardie, 'if you are then you need to have confidence that if things don't go your way it's on your head.

Otherwise you may want to have a financial adviser who knows better which Sipp is right for you and which investments to make.'

'The name implies that there is over a million people in the country that are keen and able to self-manage their own pension,' adds Bob Woods, chairman of pensions consultants Mattioli Woods, which offers its own Sipp as well as providing investment advice – a rare combination.

'In fact there is only a very small number of people who want to do this, most just want to have control over the pension with professional advice to help them. As well as in the spectrum of available investment types, there is also variety between types of Sipp.

While the pure-form Sipps remain very popular, recent years have seen many providers make use of new technology in fund supermarkets and online access to offer investors individual pensions with a wider range of investment options than stakeholder and personal pensions, but at a lower cost.

Chris Smeaton, head of product development at James Hay, which together with fellow IFG Group-owned IPS has £13 billion of Sipp assets under management, says it is easy to see the attraction.

He explains, ‘There are three types of Sipp: simple, hybrid and full fat. Simple online products are low-cost, do-it-all-online, using quite a restricted range of investments from unit trusts and OEICs to keep costs down. ‘You probably won't have to pay a set-up or annual fee.Lots of customers don't need anything more than that and that type will meet the needs of the vast majority.

'Then there are the hybrid or insurance-based Sipps from life companies like Aviva and Clerical Medical. They have a simple range of unit and other trusts as well as the option of investing in stocks and shares and some other more exotic things – allowing slightly more options than the cheapest but creating a number of restrictions to keep costs down. They are sold very heavily so they are quite popular.

‘Then there's the full Sipp, which allows you all the exotic investment options – and as some are very high risk most of our customers use a financial adviser.'

James Hay, one of the first Sipp providers, operates at the top end of the market, offering customers with large pensions pots the flexibility to invest in whatever they want. 'Our full fat product,' says Smeaton, 'is £455 per year plus £290 to set it up, with the only charges of £14 per transaction for the more exotic transactions.'

The company also has its e-Sipp, which has no annual or set-up fee, the only fee is a £50 charge when you make a transfer or contribution.

Like many of its online cousins, investments are limited to an extensive but limited range of unit trusts, OEICs and pension funds as well as share dealing through the Abbey share dealing service. Smeaton explains,

'It's not portfolio size that should determine which Sipp you pick, it's more about the level of sophistication of investment and the flexibility you want your pension portfolio to have.

‘It's horses for courses: Our full Sipp is like a BMW 7 Series, while the e-Sipp is like a Mini: some customers want all the features of the top-of-the-range option, but others are happy with a simple, efficient option to get them from A to B.'

You might want to look for a scheme that allows you to add services as you need them, when your requirements become more specific or your investing confidence increases.

'Look for a SIPP that doesn't tie you to anything,' Hardie suggests. 'But don't pay for other things that you are not likely to use.’

Smeaton says that investors should also think about whether to buy a SIPP that might allow you to switch on other things later if you don't want them now but think you might in the future.

He says, ‘You can have a SIPP where you're not paying for the full range of flexibility now, but where you can switch them on later.'

Cheap and cheerful?
Some providers – usually those selling the more expensive options – argue that a Sipp without the 'full fat' is not a Sipp.

However, Tom McPhail, head of pensions research at Hargreaves Lansdown (a pioneer of these online wrappers) stands up for what has proved an immensely popular product in recent years.

'Whereas a stakeholder only gives you access to 20 or 30 funds, a Sipp can offer a huge amount more, with around 2,000 on our platform for instance.'

Pensions sold and administered online by Hargreaves Lansdown and its competitors offer Sipps allowing movement between cash, OEICs, direct equity investments, exchange-traded funds and investment funds. This can be done online and at a price that sits around the price of a stakeholder plan - considerably below the cost of Sipps a decade ago.

While he admits its 'never going to be a perfect solution for everybody' the company is running around 90,000 Sipps, so it's clearly good enough for many.

However, investors should beware of SIPPs with no initial costs as their charges could be per transaction, so you need to invest time to do your research before choosing.

Reputation online Price is naturally a primary concern but a provider's reputation is also an important consideration, as several schemes are run by smaller providers. Some in the pensions industry see these smaller schemes as unsustainable in the long-term.

The pessimists were proved correct recently when one smaller provider, The Freedom Sipp Ltd, was wound up in April after being liquidated for non-payment of tax.

'After the Icelandic banks and companies like Lehman Brothers, many people want a well-known and reliable UK brand,' adds Hardie, of Standard Life.

Furthermore, an FSA report into SIPPs last autumn criticised some unnamed smaller providers for not taking enough responsibility for the performance of the schemes that their clients are investing in.

Investors wanting to measure the detail of the products, may wish to look at the SIPP rating tool from researcher Defaqto. This can be found at www.defaqto.com/star-ratings/sipps.

Flexibility and development In the next year there will be another distinguishing feature for older savers to consider – not what happens when you first buy a Sipp but what happens nearer the end – as the coalition Government is set to introduce more flexibility, by doing away with the compulsion to buy an annuity that currently exists.

Current legislation gives you two options: either buy an annuity, or risk a 70 per cent tax charge on your remaining funds. The government is proposing to scrub this and allow people to draw down as much as you like as long as they secure an annual income of £7,500 minimum.

Hargreaves Lansdown’s McPhail has been a big supporter of the removal of the compulsion to buy an annuity. He says this will mean 'we'll see more people looking to manage their assets in their Sipp so we should see more flexibility in pensions'.

Furthermore, with the minimum retirement age set to be knocked back, the flexibility of the Sipp, where, among other things, you don't have to set a retirement age, is becoming an ever more interesting option.

But, because of the flexibility and the range of different schemes to choose it is possible more crucial that ever to do plenty more research before diving in.