The growth in the number of SIPPs have been dramatic over recent years, according to the latest figures from one SIPP provider, InvestACC, there are now more than 700,000 SIPPs in existence. Projections show that if the current rate continues there will be over one million SIPPs sooner rather than later.
But when is a SIPP the right choice for your retirement planning?
Equally importantly when is a SIPP the wrong option?
We regularly talk to investors who say they want a SIPP, but when should and shouldn’t one be used?
A SIPP is generally right for you when…
You want to buy a commercial property in your pension. SIPP commercial property purchase is becoming more popular and is not possible via a Personal Pension or Stakeholder and needs to be done through a SIPP, or indeed a SSAS (Small Self Administered Pension). SIPP commercial property has many advantages and disadvantages, which we have covered previously and can be read here.
You want to invest in SIPP deposit accounts. If you are a low risk investor, using a Cash or Deposit style investment can be sometimes appropriate. However, given the low level of interest rates we are currently experiencing the returns from most Cash and Deposit funds within traditional pensions are extremely low and usually barely cover the charges.
Deposit accounts in SIPPs have therefore become increasingly popular in SIPPs especially amongst those people nearing retirement, waiting to invest or planning to buy a commercial property.
You want to appoint a Discretionary Fund Manager. If you are looking to appoint a specific fund manager to look after your money this can only be done through a SIPP.
You want, and perhaps more importantly, will use, wider powers of investment. Perhaps you wish to invest in a wider range of assets than the usual fund range you see on many Personal Pension contracts. A SIPP can hold a wider range of investments including shares, other directly held assets, Structured Products as well as property and SIPP deposit accounts as we have already mentioned.
The charges of a SIPP, the investments you will make and the on-going advice are more cost effective than other alternatives. For some, especially those people who have smaller pension funds, a SIPP can be more expensive that the alternatives. However, for larger funds a SIPP can be cheaper than a Personal Pension.
Clearly there are some occasions when you have to use a SIPP, for example if you want to buy commercial property. However there are times when a SIPP can actually be cheaper than a Personal Pension.
Of course each SIPP provider’s charging structure should be considered and compared to alternatives before a decision is made.
A SIPP is generally not right when…
You will not actually use the wider investment powers. We occasionally see people who have a SIPP but are not using the different investment options and would pay lower charges if they were to use a Personal Pension or Stakeholder Pension as an alternative.
Before using a SIPP think carefully whether you will use the wider investment powers, if you won’t and the charges are not lower than an alternative, then a SIPP is probably the wrong choice.
You have a relatively small pension fund. SIPPs are rarely right for smaller pension funds, this is because they generally have fixed charges which eat into your pension more quickly than if the fund were larger.
For example, if you have a £20,000 fund a typical annual charge of £400 is 0.8% of the value, once you then add in investment charges and potentially the cost of advice it is likely that an alternative would be cheaper. As we have already covered the reverse is true; the larger your fund grows the more economical a fixed charge is.
There are exceptions to the rule, where the SIPP provider calculates their charges on a percentage basis, however as SIPP Zone shows on our website, these are few and far between. Click here to visit SIPP Zone.
When an alternative does the job just as well. If a Personal Pension or Stakeholder does the job just as well, and is as cost effective then you probably don’t need a SIPP. The marketing departments of many SIPP providers are excellent at what they do and in some cases add the SIPP label to plans which have very little extra functionality than a Personal Pension, compare all the options before you decide whether a SIPP, Personal Pension or Stakeholder is right for you.
In conclusion
Like almost all financial products, SIPPs are suitable for the right person at the right time, however the reverse is also true and we often see people who have a SIPP when it really isn’t appropriate.
Likewise, we receive enquiries from investors who really should use a SIPP but are struggling with an unsuitable alternative.
As the old saying goes, it’s ‘horses for courses’.
Our team of Independent Financial Advisers in Nottingham are experienced in advising SIPP investors on their cash options, if you would like advice on your options call one of our IFAs today on 0115 933 8433
0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk
