You're wasting your money with a SIPP

The increasingly popular 'SIPP' pension has been criticised as inappropriate for many pension savers.

Skandia has said that 90% or more of those with self-invested personal pensions (SIPPs) are potentially using more expensive products for no reason. 

Skandia's marketing director, Nick Dixon, said that: “...there is a danger that many SIPP customers are in the wrong product.” By the end of this article I will agree with that, although not for the same reason as Skandia. 

Two advanced choices for pension savers 

If your employer already provides you with a pension and you think you don’t need any extra pension provision, you probably don’t need to read any further. But if  you don’t have a pension or you want an extra one, then platform pensions and self-invested personal pensions (SIPPs) are two of the best-known options. 

Skandia, which runs the biggest pension platform in the UK, says that too many people are going for SIPPs, because they aren't using them fully. Hence, they could do better by getting a platform pension, it says. 

About platforms 

Platforms offer a great array of investments in a large number of investment funds, usually hundreds or thousands of choices from dozens of fund providers. (Platforms can be subdivided into so-called fund supermarkets or fund wraps, but we don't need to concern ourselves with that subtlety here.) 

Platforms often help you avoid the high initial charges that many funds charge (sometimes as much as 5% of each contribution). With platforms you also may end up paying reduced annual management charges to the fund manager which I would define as 0.5% or less. 

You might also have to pay an annual fee to the platform provider on top of the annual charges, which could be a flat fee or a percentage of your total pot. 

About SIPPs 

With SIPPs you can usually invest in lots of funds too. Some offer nothing more than that, meaning that in reality they’re no different from platforms. (Indeed, some SIPPs offer  less choice than platforms!) This is one reason why it's hard to support Skandia's argument that people should flip from SIPPs to platforms. 

If it's your bag, many SIPPs – the ones that truly deserve the name SIPP – will also let you invest in individual shares and ETFs. Some go further than that, allowing you to bundle in such things as National Savings products, your own commercial property if you're a small business, farm and woodland, and gold bullion. 

SIPP costs can be even more complicated than with platforms once you add in different charging structures for shares and more exotic investments. 

Examples of platforms and SIPPs

I can't review all platforms and SIPPs, but I'll go through the best I've stumbled across over the years, having double-checking the prices today. 

The Alliance Trust Select SIPP has access to six super-cheap index trackers – from Vanguard – with the funds charging as little as 0.15% per annum in annual-management fees. 

You have more than 1,400 more funds to choose from, too, which is plenty for most of us. In addition, you pay a £135 annual administration fee to Alliance Trust. Share-dealing costs at least £12.50 and dividend reinvestment costs £5. 

Alliance Trust also has a Full SIPP, which allows you to invest in everything that Revenue & Customs lets you invest in – meaning all the exotic things too. This costs £474 to set up and £660 per year, plus extra charges depending on precisely what you invest in. These are hefty costs for your flexibility, so it is to be avoided unless you are an expert in one of these exotic investments. 

Fidelity Personal Pension has a larger selection of funds than Alliance Trust including cheap trackers, although it doesn't have the super-cheap Vanguard trackers. 

However, you can't buy individual shares or anything else, which means this is a platform by most people's definition. (Even though Fidelity refers to it as a SIPP, but that's not important.) This comes with no set-up or annual administration charges, so you just pay each fund's annual management charge. 

If you're primarily interested in investing in individual shares, rather than funds, look into SIPPDeal. This has no set-up fees and no annual administration charges. It usually costs £9.95 to buy and sell shares. 

Note that you could buy exchange-traded funds (ETFs) in this way, because they are bought and sold on the stock market. ETFs function like index trackers and, on average, are nearly as cheap as the best index trackers. Read more in Two simple ways to invest better in shares. 

SIPPDeal does let you invest in funds too, but the offering isn't as attractive to me, when looking at the annual management charges and small range of index trackers. 

The popular Hargreaves Lansdown SIPP is also worth a look for more balanced charges between funds and share-dealing. Sadly the firm increased its charges recently, but it did add some cheap trackers in return. 

A cost-saving interlude

If you think I'm focusing too much on costs and charges, and not enough on the expected gains from each of these investments, think again. The key factor in investing is costs. 

Most people who pay just a few hundred pounds extra a year, or just half a percent more than the cheapest offering, can expect to do worse. That's the weird thing about investing: higher costs usually means lower returns in the long run. In investing, you don't get what you pay for. 

It comes back to costs again

The real difficulty is in the comparison of costs and charges, which is incredibly difficult for most people to do. Whether you're comparing two SIPPs or one SIPP and a platform, the cost structure is often so different that it requires significant effort and maths skills to estimate which will be best for you. 

Don't overlook more simple pensions 

When Skandia said SIPPs weren't for everyone, it meant that you should instead invest in platforms – like Skandia's own. However, while I agree that SIPPs are too expensive and complicated for most investors, platforms aren't necessarily much better. In addition, comparing SIPPs and platforms is a big headache and so, overall, they're probably not suitable for many lovemoney.com readers. 

Luckily, we can avoid this nightmare altogether by going for the most simple pension product: stakeholder pensions. While some are totally naff and over-priced, others give the vast majority of retirement savers just what they need from their pension: a handful of index trackers at low cost. 

If you want to set up a stakeholder pension, check out discount broker, Cavendish Online. It charges a one-off £35 fee when you set up a stakeholder pension through it from any pension provider. It will then rebate some of the commission – including from the index trackers. If you take the Aviva stakeholder pension, for example, many of the trackers will be reduced to just 0.55% annual management charge as a result. It’s an especially good deal for smaller pensions. 

More: as an alternative, or in addition, to a pension, compare share ISAs through lovemoney.com | The best Sipp for your retirement | Become a pensions expert in five days