The general consensus is that it is never too early to start saving for retirement, but with so much choice facing those planning for their golden years, it is not surprising that many put it off until the last minute.

A Self-Invested Personal Pension (SIPP) is a tax-efficient wrapper that enables investors to make their own investment decisions within their pension fund, from a wide range of approved investments, including stocks and shares, unit trusts, investment trusts, managed funds and property.

The popularity of SIPPs has soared since reforms were introduced in April 2006 that increased how much you can pay into your SIPP and allowed more freedom over where it can be invested and how benefits are paid on retirement and death.

Think before you act
But before you rush out and buy a SIPP, it is worth doing a bit of research, as Brian Potter, a financial adviser and stockbroker with Edward Jones, points out. ‘There’s far more to investing for retirement than simply putting money into a plan every year.

‘Making the most of retirement savings requires clearly defined objectives and a solid investment strategy based on specific long-term goals. This involves determining the amount of annual income required in retirement and the amount of wealth that must be accumulated to generate that level of income.’

When it comes to researching and planning your SIPP, it is important that you understand the range of options available. ‘The first question you need to ask yourself is what type of investor you are,’ says Tom McPhail, head of pensions research at Hargreaves Lansdown. ‘Are you looking for a fund supermarket, regular equity trading, or commercial property. There is a range of SIPPs available, each suited to different types of investor.’

More choice, higher cost
The thing to bear in mind is, the more there is to choose from, the higher the cost of the product. So, at the lower end of the market, you might find that SIPPs only offer access to an enhanced range of funds and stocks and shares on top of what is offered by a personal pension.

McPhail explains, ‘Hargreaves Lansdown’s own SIPP, for example, is ideal for investors who want to focus mainly on unit trusts and OEICs, cash and perhaps the odd equity trade. Alliance Trust, on the other hand, is suitable for investors who anticipate making heavy volumes of equity transactions and Suffolk Life are particularly good for direct commercial property investment.’

For those SIPPs that allow you to invest in anything and everything, from funds to traded options, you can expect a hefty price tag. David Seaton, director at Rowanmoor Pensions, says, ‘The normal charge to set up a SIPP is around £400 and it can cost anything from £500 to £1,000 per year to run. For example, if you have commercial property in your SIPP then it is likely to be more expensive.’

At the other end of the spectrum, there are some SIPP providers that don’t charge set-up or annual management fees at all, but instead charge a percentage for various deals that you make, ranging from 0.5 per cent to 0.75 per cent, or take an administration charge of around £20 per quarter.

But most people ignore the charges. Recent research from Fidelity International has revealed that one in three SIPP investors are unaware of the charges they pay, and of those that do know, 46 per cent feel that they are set too high.

‘Most people would not dream of paying over the odds for their gas bill or their car insurance, yet a pension, as one of the most important pieces of financial planning they will ever do, is often overlooked,’ points out David Dalton-Brown, head of Fidelity FundsNetwork.

Money talks
So you have weighed up the pros and cons of the various products that are available in the SIPP universe. The next thing to consider is how much you need, or can afford, to invest in order to have a decent income when you reach retirement.

According to BlackRock, saving for retirement comes behind making mortgage repayments, paying off student debt, looking after children, parental care and maintaining a reasonable quality of life, which could spell disaster for many future retirees.

‘The day you start work is the day you should start investing in a pension,’ argues David Seaton. ‘Let’s say that you start your first job at the age of 25. You will probably work to the age of 70, giving you 45 years to build up your pension pot. Today’s 25-year-olds are expected to live until the age of 95, which means you have to save enough to provide an income for a further 25 years after you have finished working – an awful lot of money.’

So let’s do the maths. ‘A 25-year-old man earning £30,000 who wants a target income of £15,000 a year in today’s terms at age 65, needs to be saving around 14.25 per cent of his income every month,’ says Tom McPhail. ‘For a 30 year old, the figure rises to 18 per cent of his income and for a 45 year old, the target saving rate is a brutal 40 per cent of income every month.’

Sorting out your retirement plan, however, isn’t all doom and gloom. Remember that formalised pension investing has benefits in the form of tax relief. If you are a taxpayer, you are able to contribute 100 per cent of your earnings, before tax, up to £235,000 (for the current tax year) and get income tax relief at your highest rate.

Alternatively, if you aren’t a taxpayer, you can contribute up to £3,600 per year into a SIPP and still get basic tax relief – in simple terms, you pay £2,808 and the taxman will top it up by a further £792.

Tax-free growth
And the benefits don’t stop there. Your pension fund is also able to grow free of tax, and you can contribute towards someone else’s personal pension – maybe your partner or child – and they will benefit from basic rate tax relief without your tax status being affected.

There are an increasing number of low-cost, tax-efficient SIPP structures available for those people who want to take control of their pension savings. However, while SIPPs provide the greatest amount of flexibility and investment options when compared to other forms of retirement savings, they might not be the best option for you, so research what is most suitable for your long-term needs.