Self-invested personal pensions (SIPPs) were once the preserve of the wealthy due to high charges making small investments prohibitive. But increased competition in recent years has driven down costs dramatically, to the point low cost SIPPs are now viable for most of us when saving for retirement.
What are SIPPs?
A SIPP is like any other money purchase pension (i.e. one where you invest the money to try and build up a nest egg that provides income during retirement), with the exception that it offers a very wide choice of investments. This should include unit/investment trusts, shares and exchange traded funds. You can read more about SIPPs on our SIPP page.
Action Points
1. Do you really need a SIPP?
If you only want to hold a handful of managed/tracker funds and aren't interested in shares, then probably not. One of the better stakeholder pensions on the market should cost effectively meet your needs, especially if just contributing a few thousand pounds or saving less than £50 per month.
2. Is a low cost SIPP suitable?
The main compromises when using low cost SIPPs versus more expensive variants are not being able to hold commercial property (buildings) in your pension fund and being tied to a single cash account.
The latter can become a big issue if you expect to hold sizeable cash balances as interest rates are usually derisory, in some cases zero percent. This is a nice earner for low cost SIPP providers (they'll earn more interest on the money elsewhere and pocket the difference), so don't expect the situation to improve.
3. Review investment choice
The main reason for using a SIPP is investment choice, so make sure the investment(s) you want to hold are available. While all low cost SIPPs tend to offer in excess of 1,000 funds, choice does vary so if you're seeking a small or esoteric fund you may find it's available via some SIPPs but not others. Shares should be available but you might be restricted to those listed in the UK, so if you wish to buy shares listed overseas check whether they're available.
4. Can you draw an income during retirement?
Drawing an income from your pension during retirement (in preference to buying an annuity) is becoming more common. And recent rule changes increasing flexibility to draw an income beyond age 75 may further boost the appeal. Check whether your preferred SIPP offers this facility and, if so, the associated charges.
5. What kind of service do you need?
The cheapest SIPPs don't pay sales commissions to financial advisers, so if you need advice expect to pay more. Some low cost SIPPs provide fund research as part of the deal, but you'll still have to make your own investment decisions.
6. Check charges
While low cost SIPP charges should be reasonable, some are more so than others (see the comparison below). The main charges to look out for are:
Annual SIPP charge - some providers charge an annual fee for the SIPP 'wrapper', this is separate to any annual costs on the underlying investments.
Dealing fees - while you'd expect to pay dealing fees for buying and selling shares, some providers apply this to funds too. If you plan to trade a lot then check how competitive the charge is.
Fund charges/trail commission rebates - fund charges should be the same as those charged by the fund manager directly, but the SIPP provider might reduce these 'standard' charges by rebating commission and/or other fees they receive from the fund groups. Annual charge (trail commission) rebates are especially valuable as you'll benefit for as long as you hold the fund.
Income drawdown - as mentioned above, do any charges apply if you decide to draw an income during retirement instead of buying an annuity?
Transfer penalties - if you decide to move your SIPP to another provider in future, will you be charged to do so?
7. Choose the underlying investments
There's little point opening a SIPP then buying a bunch of mediocre investments, or biting off more risk than you chew. Choose your investments carefully, ensure they're appropriate for what you're trying to achieve and keep an eye on them in future.
Comparison
While not exhaustive, the comparison below includes what I believe to be the better low cost SIPPs currently available that allow both funds and shares (including investment trusts and ETFs) to be held. The projected values take account of charges and annual fund charge rebates, to help you determine which SIPP providers are likely to be cheapest.
| Alliance Trust Savings | Bestinvest | Hargreaves Lansdown | Sippdeal |
|---|
| i.nvest Select SIPP | Select SIPP | Vantage SIPP | SIPP |
|---|
| Annual fee (ex VAT) |
£125 |
£100* |
0.5%** |
nil |
| Share dealing (online) |
£12.50 |
£7.50-£12.50 |
£5.95-£11.95 |
£9.95 |
| Fund dealing (online) |
£12.50 |
nil |
nil |
£9.95 |
| Income drawdown setup/annual (ex VAT) |
£200/£50 |
nil/nil |
nil/nil |
£150/£75 |
| Exit fee (ex VAT) |
£125 |
£75 |
£75 |
£75 |
| Interest rate on £10,000 |
0% |
0% |
0.1% |
0.05% |
| Typical annual fund charge rebate |
0.50% |
0.15-0.25% |
nil |
0.25% |
| Fund research? |
No |
Yes |
Yes |
No |
| *only if you hold an investment that doesn't pay trail commission. **on investments that don't pay trail commission, capped at £200. |
| Projected value after 20 years assuming 7% annual growth (see notes below for assumptions) |
|---|
| £25,000 |
£75,180 |
£71,237 |
£72,634 |
£76,929 |
| £100,000 |
£318,648 |
£304,541 |
£291,832 |
£308,086 |
| Figures assume money split equally between Aberdeen Emerging Markets, Invesco Perpetual High Income, M&G Recovery and iShares FTSE 100 ETF. Commission rebates assumed to reduce annual charges. |
Last updated 5 September 2011
Useful links
You can read more about SIPPs on our SIPP page.
Candid Money retirement calculators