A SIPP puts you in charge of your pension.
What is a SIPP?
SIPP stands for self-invested personal pension. As the name suggests, with a SIPP, rather than handing over your cash to a pension provider and leaving their fund managers to decide where to put it, you make the investment decisions yourself. So you have more control over exactly where your pension pot is going.
Initially, SIPPs were the exclusive preserve of the wealthy. However recent years have seen them become far more accessible to those of us with more modest pension pots, thanks to a number of low-cost options.
Picking the right SIPP
The first thing to be clear about is that SIPPs are not all the same – each SIPP provider offers a slightly different service, so you should be very clear about what you are signing up for before you open an account.
Some will allow you to place virtually any investment within your pension plan, including things like commercial property. These SIPPs tend to be on the more expensive side of the spectrum.
However, there are also low-cost SIPPs, designed to give the likes of you and me a little more autonomy, offering a range of funds to invest in, as well as a share-dealing service so you can pick specific companies to invest in.
The right SIPP for you really depends on what you want to invest your pension savings in.
It’s not just what you can invest in that will vary though – the cost of your investments will vary by SIPP provider too. More on that later.
What can I invest in?
Below is a list of some of the things you may be able to invest in with your SIPP.
- Corporate bonds
- Commercial property
Perhaps the simplest way to invest your pension pot is to put your money into a few different funds.
A fund is basically a number of investments, under a single 'umbrella', typically with some sort of theme.
So, to take an example, the JP Morgan Natural Resources fund invests primarily in the shares of companies involved in the production and marketing of commodities such as Glencore and Rio Tinto.
The fund is run by one or more fund managers, who decides where the money should be invested.
There are a huge number of funds out there, so actually identifying which ones to put your money into can be a little tricky. Some people like to put their money behind ‘superstar’ fund managers like Neil Woodford, who have a long track record of success, but past performance is no guarantee of how the fund (or its manager) will perform in the future.
Another problem with managed funds like these is that they frequently don’t perform that well, with many failing to even match the performance of the index itself. And as they are more expensive than tracker funds (which we will look at in a moment), you could end up paying more for an inferior return.
Before you invest in any fund, be sure to read the fund’s prospectus so you are clear about the investment strategy of the fund manager (and their own track record), where the fund is currently invested, and what charges will apply in future.
Alternatively, you could go with an index tracker. These aim to follow a specific index, such as the FTSE 100. The tracker will buy all of the shares in that index, so should the FTSE100 go up by 20%, your investment should increase by roughly the same amount. So while you will never outperform the market, you shouldn’t ever be too far behind it either, which is why index trackers are popular as a cautious investment.
What will I pay?
The fees that you will be charged when running your SIPP will vary by provider, but they will fall into a number of broad camps.
Admin fees: These are the fees you pay just for having a SIPP. Some providers, like Hargreaves Lansdown and Fidelity, don’t charge set-up fees, while others, like Alliance Trust Savings, charge as much as £155 plus VAT.
Annual fees: You may be charged an annual fee based on what investments you have in your SIPP. For example, if you have a pension pot of less than £250,000 with Hargreaves Lansdown, you’ll pay a 0.45% charge on the money you have invested in funds and shares. AJ Bell will charge you 0.2% for the money in funds, though nothing for your shareholdings, while Alliance Trust Savings won’t charge you anything for either funds or shares.
Dealing fees: When you buy or sell shares, your SIPP provider will almost certainly charge you. These fees tend to range from £7.50 to £11.95, though if you make a lot of trades the fee you pay may be reduced (AJ Bell cuts its fee down to £4.95 when making 10 or more trades, for example).
The situation is a little more varied with funds. While some will charge you for buying or selling a fund (Alliance Trust charges £12.50 per trade), others allow you to do so free of charge.
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