Jenny Lowe discusses how you can choose the right type of self-invested personal pension.

A self-invested personal pension (SIPP) differs from a traditional personal pension in that it allows you, the holder, to take more control over your investments. It is a tax-efficient wrapper into which you can place certain types of investments, such as listed stocks, mutual funds and even commercial property.

The popularity of SIPPs has been on a powerful upward trajectory for a number of years, as a growing number of investors take control over their own pension funds.

But while the idea of moving your pension funds into a SIPP may appeal to you, identifying the most appropriate product for your needs can be daunting. There are over 50 companies currently operating in the SIPP market, each offering products with different charging structures and investment choices.

Philip Hutchinson, head of corporate SIPP sales at Pointon York SIPP Solutions, enthuses, ‘A properly constructed and managed SIPP is one of the most open pension frameworks that exist today. It offers the most flexibility of any pension product in the marketplace – a scheme where the member can have as much or as little involvement in the control and decisions regarding their investment strategies within the scheme as they wish.’

What do you want?
Your first step should be to analyse what you yourself want from a SIPP. Do you want to buy and sell shares, and how frequently? Do you want to invest in commercial property? Are you happy to stick with some investment funds and remain invested for the long term?

‘The crux of the matter is that you need to know what you want to do with your SIPP before you choose your provider,’ explains Richard Mattison, business development director at SIPP provider The IPS Partnership. ‘There’s little point in selecting a more expensive SIPP to allow you to buy commercial property if you are unlikely to do so. Furthermore, think about how many times you really do buy and sell funds during a year. If you trade frequently then it will be expensive to have a SIPP that charges for each transaction.’

Once you’ve worked out your strategy, you can set about choosing between three different types of SIPP. You can break the industry down, albeit somewhat loosely, into these main categories: low-cost providers, insurance companies and what are commonly referred to as ‘full SIPPs’.

Cheap and cheerful
Low-cost online providers, such as Hargreaves Lansdown, James Hay’s e-SIPP and Fidelity FundsNetwork, allow investors to make their own investment choices without the use of an IFA. ‘These products are built to deal directly with the public, and most offer three categories of investments: funds, cash and shares,’ suggests Tom McPhail, head of pensions research at Hargreaves Lansdown.

‘Our 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, while Suffolk Life is particularly good for direct commercial property investment.’

Low-cost plans don’t normally charge you a set up or annual fee on the SIPP wrapper itself, but you should expect to pay dealing costs if you want to buy and sell shares. Dealing costs vary widely between providers, so this is another factor for you to check out.

If you put your money in investment funds, you’ll usually have to pay an initial charge and an annual management fee, but most SIPP providers negotiate significant discounts that bring these costs down.

‘It isn’t about age, investment amounts or even investment knowledge, so much as whether an investor wants to get the most out of their pension fund,’ McPhail adds. ‘You can set up a SIPP for as little as £50 a month and some have no fixed set-up or annual fee, so they work just as well for £1,000 as they do for £100,000. Similarly, investors can set their investment strategy according to their investment ability.’

Shake it up
Some providers offer deferred SIPPs, or hybrid plans. A hybrid SIPP typically offers access to the insurance company’s own funds as well as a wide range of externally managed funds – usually run by investment houses. A deferred SIPP, on the other hand, is a personal pension written under a SIPP trust.

Typically there is no minimum amount of internally managed insured funds that have to be funded prior to being allowed to invest in externally managed funds. Hence the deferred SIPP invokes many of the wider investment powers associated with a full SIPP from inception, but without the correspondingly higher charges. It’s a useful option for those who are happy to hold investments in insured funds for the time being but think they may want to have a SIPP at a later date. This also cuts out having to pay the transfer costs between SIPP providers if you realise that your current provider doesn’t allow certain investments.

‘Insurance companies have really marketed these under the SIPP brand, but until the function is actually turned on, it is just a personal pension,’ explains Laith Khalaf, pensions analyst at Hargreaves Lansdown. ‘Investors can probably get a low-cost SIPP that offers the fund-based investments for the same cost, if not cheaper.’

So, a typical low-cost SIPP would have an annual administration charge of £100 to £200, whereas a deferred SIPP without the SIPP option would probably cost the same. If you were to ‘turn on’ the SIPP feature and invest in a basic selection of assets then it would cost an extra £200, and if you wanted to include more exotic investments, such as property, it would cost a further £400.

Pointon York’s Hutchinson says, ‘It is important to establish a specification for your needs first so you can benchmark potential providers. In the world of SIPPs it is easy to be distracted by the lure of cheap or “free of charge” offerings that are too restrictive and therefore may not deliver your requirements.’

The full monty
Finally, there is the ‘full’ SIPP. This allows you to include everything from cash and investment funds to commercial property and contracts for difference (CFDs).

Investing in commercial property is very popular with businesses, where directors form a syndicate in order to purchase their office or works building. The property is shielded from capital gains tax in the pension fund, rental income rolls up tax free within the SIPP, making it a very tax-efficient way of owning a commercial property. Once any borrowing is repaid, the rental income can be used to provide pensions in retirement.

When it comes to setting up a ‘full’ SIPP, you can expect to pay around £400 initially, and it can cost anywhere from £500 to £1,000 per year to run. The general rule of thumb here is that the more you invest in, the more it costs, so if you want to hold commercial property, for example, expect to pay a little more to do so.

Horses for courses
Martin Tilley, pension consultant at Dentons Pension Management, says, ‘For many, the investment flexibility available from the first two options will be sufficient for their immediate needs, particularly in the growth phase prior to pension benefits being taken.

‘It would not be appropriate for a full SIPP at the top end of the market to be employed only for the purposes of holding a managed portfolio of unit trusts, since this could be accommodated further down the SIPP range, or even in a platform-based personal pension.’

However, Tilley points out that  ‘One should not assume that all features are permitted by all SIPP providers. And, while not all of these features will be required at the outset when the SIPP is selected, they may well become factors at a later date.’

It is also important to look beyond the product when it comes to choosing a SIPP provider. Pension planning is one area of financial services where investors would benefit from getting advice from an independent financial adviser that specialises in pensions.

An adviser will not only be able to assist in choosing the right provider and the types of investments to include in your SIPP, but will also have a certain amount of knowledge as to what levels of service are available, such as online reports, the ability to contact someone and the ease of buying and selling investments.