If you want to have greater control of how you save for your retirement, you may want to consider a self-invested personal pension (SIPP). A SIPP is really just another type of personal pension with contributions qualifying for tax relief at your marginal rate and any investment growth tax-free.

However, whereas most conventional personal pensions provided by insurance companies offer only a limited range of investment funds, SIPPs enable you to invest in virtually anything, including shares, warrants, futures, options and hedge funds.

SIPPs can also be used to invest in commercial property and you can even borrow up to half of the value of your pension pot to help fund the purchase. The rent paid by the tenant, which could be your own business, is then paid into your SIPP. Many SIPPs also offer drawdown policies, meaning that you can take income in retirement while remaining fully invested.

General appeal
SIPPs, once the preserve of the super-wealthy, are now targeted at a broader range of investors. Martin Tilley, managing director of Dentons Pensions, says, ‘Over the past two or three years, there has been a huge surge of interest and charges have come down significantly.’

This began in 2005, when the government proposed allowing residential property to be held in SIPPs. Thousands of wealthy investors queued up to use the tax relief to help fund the purchase of holiday homes and so the plans were quickly shelved, but by then SIPPs were already in the public eye.

Pension simplification and the internet, which facilitated the launch of a wave of low-cost providers in 2006, have both served to fuel the recent boom. Pension simplification enabled investors to hold occupational and personal pensions simultaneously. Many took this opportunity to consolidate the myriad of pension plans built up over the years into a single, more simple plan.

‘A lot of people who had been saving into pensions for over ten years had a selection of pensions whose performance has often been terrible,’ Tilley says. ‘Pension simplification really opened people’s eyes.’

Pension companies were quick to respond and there are now over 150 product providers authorised by the Financial Services Authority to run SIPPs. The downside is that investors are faced by a bewildering array of products marketed under the SIPP banner.

A difficult choice
‘It really is a case of “buyer beware”. A lot of companies are using the SIPP name simply to attract attention,’ warns Christine Hallett, managing director at Pointon York SIPP Solutions. ‘Investors have to peel off the layers to see what the product actually allows them to invest in.’

Indeed, not all SIPPs support the full range of investments. Many companies now offer low-cost ‘baby’ or ‘starter’ SIPPs, which only allow investors to hold funds. These are often sold on an execution-only basis through fund supermarkets.

They operate just like individual savings accounts (ISAs). Investors can choose from the massive range of underlying funds available, switch between them online and even move into cash when markets are heading south.

‘Hybrid’ SIPPs are a slightly different breed. They are typically offered by insurance companies, such as Standard Life and Legal & General. The catch here is that you have to invest a set amount in the insurer’s own funds before you can use the self-investment option.

Traditional SIPPs, or full SIPPs as they are often known, offer complete investment flexibility. However, not all providers are geared up to accept transfers of existing stocks and property held by investors, or ‘in specie transfers’ to use the industry’s language. Some providers allow investors to take out basic SIPPs and then ‘upgrade’ them in the future as their pension pot grows.

Focus on what you need
Deciding which of these products is right for you is crucial, otherwise you could end up paying for services you will not use. For example, greater investment flexibility may sound attractive but it is important to think hard about whether you will use it and what it is you want to invest in.

‘For the majority, a standard personal pension is cheaper and will provide access to an adequate range of funds,’ says Jeremy Abbis, principal consultant at independent ratings firm Defaqto.

‘To a certain extent, SIPP charges are based around what you want to invest in. So if you want a broader fund choice and are looking for a way into a fund supermarket, a low-cost online SIPP is probably the best option.’

Cost is a key factor when choosing between providers. Comparing charges, however, is notoriously difficult and will require plenty of research. Unlike conventional personal pensions, which typically charge between one and 1.5 per cent, SIPPs have a whole range of charges, which are normally taken as a flat fee. These may work out cheaper for individuals with large pension pots but can be expensive when viewed as a percentage of smaller funds.

Many SIPPs charge a set-up fee. This tends to be higher for more sophisticated products and a number of the online fund-only SIPP providers, such as Hargreaves Lansdown and Killik, do waive this.

The yearly administration fee, on average just over £400, must be paid on top of the annual management charges taken by the managers of any funds you hold.
There are also a host of additional charges depending on what you invest in. Share transactions incur broking fees, while costs can really add up if you want to invest in commercial property.

Lack of transparency
‘The charges are not always transparent and you often have to really look for them. Many providers have ties to stockbrokers and banks and you will have to pay a premium if you want to use your own,’ Abbis points out.

These tie-ups have led to accusations that some providers are piling on unnecessary charges or even taking kick-backs.

Stephan Wood, technical manager at European Pensions Management, advises investors to check whether they are getting a fair deal before they sign up. ‘If a provider has an arrangement with a stockbroker, ring them up and find out what they normally charge. This will let you know if the provider is loading on fees and skimming them off the top,’ he says.

Investors wishing to hold commercial property in their SIPP are likely to face additional fees unless they agree to use the provider’s own favoured solicitors. Rathbones charges £100 for the privilege, while many simply reserve the right to charge ‘additional fees’. Standard Life goes one step further and does not allow clients to use solicitors not on its preferred panel.

Levels of interest
Charges can be difficult to pin down and finding out the interest rates offered by SIPP providers on their cash accounts involves yet more legwork.

Abbis says that, more often than not, you will have to call the providers to find this out, as it is seldom published in their product literature. He stresses that this is well worth the hassle, as the interest paid can vary by several per cent from provider to provider.
Tilley says he knows of one building society, used by 13 SIPP providers, which privately admits that 11 of those firms do not pass on the full interest rate to members.

‘SIPPs are meant to be about self-investment, so we allow investors to use any high-interest account they want. If providers take a cut of the interest rate this effectively acts as a hidden charge,’ Hallett says.

Some people always buy on price; others focus on functionality. The key thing is to be honest with yourself about whether you are really going to use the extra flexibility and can justify the costs. Remember how the bread-maker was supposed to pay for itself and now sits gathering dust at the back of the cupboard?