For investors who want to make the most of their opportunities, a self-invested personal pension offers an attractive combination of tax breaks and investment flexibility.
Traditional company pensions and personal pensions offer an attractive, tax-efficient way to save for retirement – but they don’t typically offer you a great deal of investment flexibility. You may have the choice of a range of funds – exactly how many and how good will depend on the scheme. But these are unlikely to offer many unusual or adventurous options.
So for savers who want to combine the tax breaks from pensions with a more hands-on approach to investment, the obvious choice will be a self-invested personal pension (Sipp). In principle, Sipps can invest in almost anything you’d want to hold, although your choice of investments will depend on what your Sipp provider offers.
What Sipp do you need?
Sipps are commonly divided into two main types: full Sipps and platform Sipps. A full Sipp is one that offers a wider range of investments: as well as shares, bonds, funds and cash, this can include assets such as direct investment in commercial property. A small number of full Sipps also allow you to hold unlisted shares, although care is needed to avoid breaching HM Revenue & Customs rules on how much you own of a company and how diversified the other shareholders are – falling foul of these rules will incur penalty tax charges.
“In principle, Sipps can invest in almost anything you’d want to hold”
One of the most interesting features of a full Sipp is that it can borrow money to buy certain investments. For example, it can take out a mortgage to part-fund the purchase of a commercial property. When the property is then rented out, this income would go to the Sipp and be put towards mortgage repayments and the cost of servicing the property.
There are a limited number of investments that either cannot be held in a Sipp without incurring penal tax charges or where it will be extremely different to find a Sipp administrator that permits them due to past problems and mis-selling scandals. The most notable of these is undoubtedly residential property, which cannot be held directly, though you could invest in residential property through a fund. Direct investment in tangible moveable assets is also off limits. This is essentially intended to stop investors holding art, classic cars, wine and other assets that are capable of personal use inside their Sipp.
Bells and whistles
Full Sipps tend to have high fees due to the levels of administration required, and so are more suited to those with large pension funds. The average sum invested in this type of Sipp is between £150,000 and £450,000, according to consumer group Which. Full Sipps generally have an initial set-up fee and an annual management charge of several hundred pounds per year, although some are significantly cheaper than others. They may also require a minimum monthly contribution.
Firms that offer a full Sipp-type product tend to be specialist pensions administrators, such as @Sipp, Barnett Waddingham, Carey Pension Trustees, Corporate & Professional Pensions, Curtis Banks and Dentons Pension Management, rather than full-service investment firms, so you will need to appoint a separate broker or investment platform to execute trades in your Sipp. Examples of low-cost brokers that will work with several of the above Sipp administrators include iDealing, Interactive Brokers and Saxo Capital Markets.
The cheaper option
However, for the majority of investors, platform Sipps will be more than adequate. These generally allow you to hold a similar range of investments to Isas: funds, investment trusts, UK and overseas shares, and bonds. (HMRC rules allow Sipps to hold foreign currency, unlike Isas, but unfortunately no cheap platform Sipp allows this.) With a platform Sipp, you will be limited to what you can purchase through that investment platform, whereas a full Sipp may allow you access to many brokers and investment services.
Most well-known investment platforms offer access to a Sipp, including AJ Bell Youinvest (which, unusually, also offers its own full Sipp-type product), Alliance Trust Savings, Charles Stanley Direct, Hargreaves Lansdown, Interactive Investor, the Share Centre and Selftrade (which will also work with some full Sipp providers). Some of these firms have their own in-house Sipp administration division (AJ Bell, Alliance Trust Savings, Hargreaves Lansdown), while others use third-party Sipp firms to handle administration.
Picking a provider
If you choose to go with a platform Sipp – as most investors will – you will want to weigh a number of different factors when picking a provider. MoneyWeek readers tell us that cost is an important factor when they choose a Sipp, but that you often put more emphasis on factors such as the range of available investments, how easy the platform is to use, and its reputation for customer service. We agree with you about this, but would note that paying more doesn’t necessarily get you better service in the investment business. Some relatively expensive providers (eg, Hargreaves Lansdown) consistently score well for customer satisfaction, but some other pricey ones do not.
Administration and custody fees are a good place to start. Sipps are usually more expensive than Isas, due to higher administrative costs for providers. Charges will vary from provider to provider, but will usually be either a flat-fee, paid monthly or annually, or a percentage of the assets held within the wrapper. Flat fees will probably be better for those with larger amounts of savings, especially in funds, while percentage fees will probably be best for those with smaller amounts in their Sipp.
As an example, Alliance Trust Savings charges a flat fee of £155+VAT per year, while AJ Bell Youinvest charges a percentage fee that starts at 0.25% per year (this is capped at £100 per year for shares, investment trusts (ITs), exchange-traded funds (ETFs) and bonds, while for unit trusts and open-end investment companies (Oeics) the percentage gradually reduces the more you hold). Hargreaves Lansdown charges 0.45% per year capped at £200 per year for shares, investment trusts, exchange-traded funds and bonds, and again for open-end funds the percentage reduces the more you hold.
The cost of investing
You also need to factor in dealing fees. The amounts will depend on what type of investment you are buying and how often you plan to trade. So certain providers will be better if you are looking to invest purely in funds, while others will be better suited to those looking to invest in shares and investment trusts.
For example, Alliance Trust charges £9.99 per online trade, whether investing in funds or UK shares. AJ Bell Youinvest charges £9.95 per online trade for shares, ITs, ETFs and bonds, and £1.50 for unit trusts and Oeics. Hargreaves Lansdown charges £11.95 per online trade for shares, ITs, ETFs and bonds, and no trading charge for unit trusts and Oeics.
Be aware that if you are planning to start drawing your pension soon, this may change the fees you pay. For example, AJ Bell Youinvest charges £100 per year if you are taking regular income payments from your Sipp. So it’s important to check the details of charges and work out if they will be cost-effective for you. We’ve listed a selection of Sipp and pension providers of different types in , but no one firm will suit every investor.
Strength and stability
The security of your pension is a major concern for any investor. There’s been a substantial amount of consolidation among investment platforms in recent years as brokers struggle to remain profitable, due to rising regulatory costs, low interest rates (which affect how much they can earn by parking clients’ cash deposits in the bank) and reduced trading activity by clients. Many smaller firms have also sold out to larger ones, in part because the Financal Conduct Authority has forced them to increase the amount of capital they hold. This should mean a growing number of big, well-capitalised, safer firms – but it doesn’t always work out that way.
Investment firms must generally keep clients’ assets separate from their own, which means that the firm’s creditors cannot take savers’ money or assets if the firm becomes insolvent. The only situation in which you’d suffer losses would be if the provider had broken the rules and mingled client assets with its own due to fraud or negligence – which sadly sometimes happens. In that case, you would be entitled to compensation of up to £50,000 from the Financial Services Compensation Scheme (FSCS) to cover any shortfall in what can be recovered. Failures are rare and losses exceeding that amount would be unusual, but if you have a large Sipp, consider splitting it between providers to maximise your FSCS protection, especially if you are using smaller providers.