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.
Last updated: 17 March 2017.
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 cheaper 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, often zero percent. This can be 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. SIPP providers normally charge for this facility so check how much.
5. What kind of service do you need?
The cheapest SIPPs tend to 'no frills'. If you want guidance and fund research as part of the deal you may need to focus on mid to higher priced.
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.
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.
Low cost SIPP Comparison
We have a dynamic comparison tool at www.comparefundplatforms.com, where you can compare costs and features based on your own crieria.
Questions
How do platform SIPPs work?
Platforms are the administration services that ultimately hold your funds/shares, the main benefits being access to lower cost 'clean' fund versions, holding everything in one place and viewing your portfolio online. You can buy direct from most platforms, although a few only sell via discount brokers. The latter will usually levy their own fee, but might provide research, guidance or platform discounts to help justify this.
Are all platforms the same?
No. Charges vary. And while some provide potentially useful research, others simply offer a ‘no-frills’ bargain basement transaction service.
Should I buy direct from a platform?
If you’re comfortable making your own investment decisions, then yes. You’ll normally get a cheaper deal compared to investing directly with a fund provider and save on advice charges you'd incur via a financial adviser.
However, if you need help then don’t underestimate the value of good independent financial advice. Granted, not all advisers are worth their salt, but there are some good ones out there.
What service can I expect?
Not much, you’re generally on your own. However, some platforms and discount brokers do publish guidance and research, which you might find helpful. At its most basic this might simply be a few suggested fund choices, although a handful of brokers do publish more extensive research including updates on whether a fund is worth continuing to hold following manager changes etc.
Can I move between platforms?
Yes, you need to transfer your SIPP between platforms, either as cash or 'as is' (called 'in-specie'). Fees may apply for either or both, so check with your existing platform.
