The attraction of self-invested personal pensions (SIPPs) for many has been the ability to invest in assets, such as commercial property and investment trusts.

It is certainly the case that the higher contribution limits – up to £225,000 currently, rising to £245,000 for 2009-10 and £255,000 for 2010-11, mean that SIPPs will be attractive to those with larger sums to invest for tax planning purposes.

However, SIPPs will also have a wider appeal and an additional advantage, for those contracted out of the state system, is that protected rights funds gathered in personal pensions can be transferred to a SIPP from October this year.

Tax-efficient investing
SIPPs normally allow 25 per cent of the accumulated fund to be taken at retirement age as a tax-free lump sum whether or not any pension is then immediately drawn. There are tax-planning advantages in that there is no income tax or capital gains tax to pay on growth within the SIPP. For inheritance tax purposes, if the SIPP investor dies before the age of 75 and the assets are distributed within two years, the SIPP assets are outside of the individual’s estate.

Traditionally, the hurdle for many investors was that significant sums needed to be invested to justify the higher charges levied on SIPPs. However, because so many SIPP plans are now being devised with lower charges, they are becoming a much more mainstream savings vehicle.

Another perceived drawback has been the complexity of SIPPs and the need for investors to be a little more sophisticated in their investment knowledge. This is also changing. As the availability of advice around SIPPs increases, the choices for investors are much easier to organise.

Wider investment choice
Tom McPhail, pensions research manager at Hargreaves Lansdown, sees SIPPs as the pensions planning vehicle of choice for those who have some interest in what is going to happen to their retirement savings and are prepared to exercise choice over where their money gets invested.

Investors can enter SIPPs such as Hargreaves Lansdown’s Vantage plan from £50 per month of a £1,000 lump sum. For those still fazed by the thoughts of making their own investment decisions, McPhail points out SIPP savers are only taking the same responsibility for their investment decisions as when selecting funds for a personal pension.

He says, ‘You are simply being given more choice. It is just up to you how you exercise that choice. If you find your fund manager is not performing you can sack him because you have another half a dozen to choose from.’

He also highlights the increasing availability of information to help investors decide which fund to buy. ‘In our case, it is our Wealth 150 list of investment-rated funds, sample portfolios on our website and regular mailings to investors with investment research, all designed to help them to make informed decisions.’

McPhail concedes that a number of SIPP providers haven’t wholly eliminated the charges. ‘For example, with Hargreaves Lansdown when you start drawdown you pay a £75 fee, and if you do a transfer into James Hay you pay a £100 fee.
‘But charges have largely gone, so essentially what you are paying is the annual management charge for the funds, dealing costs for equities and getting an interest rate on cash.’

Branching out
If you are looking to SIPPs for the opportunity to invest in commercial property you will probably need to move away from the mainstream options to more specialist providers. Indeed, there are those who still maintain that SIPPs are only really suitable for those who understand the risk attached to these asset classes.

Nick Cooper, pension proposition manager at Zurich says its SIPP offering should only really be made available through an IFA to help investors deal with the complexities of the product.

‘If a customer wants to invest in insured funds the only charge is the annual management fee of the fund they invest in. If they then wish to use wider SIPP assets, such as investment funds, stock and shares, commercial property, etc, there is a charge of £400 per member to set up the SIPP.’

If you are looking to transfer your pension savings to a SIPP, therefore, you will need to look at the charges you are currently incurring under your existing pensions wrapper. Some pension policies may have a very low level of charges, some may charge high levels relative to the assets they are invested. Some may charge exit penalties.

Know what you want
You do need to consider carefully what you want to invest in before selecting your SIPP and also see the SIPP tax wrapper as a part of the whole of your retirement planning. Ian Porter, proposition director for wealth management at Alexander Forbes, says for those who have a pension already the attraction of a SIPP is the self direction, the ability to do things with your pension fund you typically can’t do with an insurance company offering.

He says, ‘If all you want to invest in is insurance company funds or funds derived from a retail OEIC then frankly there is no point using anything other than an insurance company personal pension, because it is all bid price to bid price switching so there is no cost to moving your money around. If you have a modest fund that is a far more flexible way of doing things.

‘If you get to the point you want to self-direct things, or appoint a discretionary fund manager who will manage your money in the way you want them to, and will do it day by day so you don’t have to think about it, that is fine with a SIPP. It is for people looking for a level of sophistication they can’t find in an insurance company.’

Porter recommends pensions savers think carefully about the most efficient way of drawing income and the most tax efficient way of scattering assets around the tax wrappers available – e.g. insurance or investment bonds,  ISAs and SIPPs. ‘The key thing to remember is that SIPPs are phenomenally tax efficient up to the point you start drawing from them. So think about the asset classes that go into a SIPP.’

Tax efficiency and flexibility
Porter explains: ‘Say you have money in a SIPP, money in your own name and money in an ISA and you want to invest in hedge funds.

‘A lot of hedge funds will be offshore domiciled and quoted and hence unregulated, which means any gains you make will typically be charged to income tax. So if you are a high rate taxpayer and invest in a hedge fund in your own name you are going to pay 40 per cent tax on those gains as and when they are realised.’

‘Offshore unregulated investments can’t go in an ISA but if you put these into a SIPP then, when you sell it, because you don’t get charged to income tax in a SIPP fund you actually receive the gains gross and automatically reinvest them. You only start to pay tax when you start to draw money out. So hedge funds can work particularly well in SIPPs.’

Similarly, he says: ‘With commercial property funds, the best institutional quality funds are offshore unregulated ones so you can’t hold them in an ISA and they generate an awful lot of their total return by way of income yield. So we historically favour these as SIPP assets as well.’