Investing Basics: Is a Self Invested Personal Pension (SIPP) right for me?
A SIPP will not be suitable for everyone, but they may be attractive to those investors with larger pension funds who have the confidence and ability to make their own investment decisions and fully understand the risks and consequences of making those decisions.
Remember, you are investing funds that need to provide you with an income during your retirement and making the wrong investment decisions may mean that you do not have a large enough pension fund to allow you to retire at the age you would like to or have the lifestyle you would like to have during your retirement.
Before deciding upon how you are going to manage your retirement planning it is wise to consider all of the available options.
Firstly, regardless of whether you decide to supplement it with a personal pension, there are few circumstances in which it does not make sense to take up the option of a workplace pension, particularly if your employer is going to contribute.
If you do have a workplace pension, then it is worth considering the best way in which to supplement this income – an ISA is another tax efficient wrapper that can be used to save for retirement with the added benefit that you can access your funds before age 55 if your circumstances require.
‘a low cost SIPP from an investment platform is likely to give you everything you need with low initial and ongoing charges’
It may also be worth weighing the relative benefits of making additional voluntary contributions (AVCs) into your occupational pension against incurring a whole raft of additional charges by establishing an additional personal pension.
If you don’t intend to take advantage of the flexibility and investment choice offered by a SIPP, a low cost stake holder pension may be a better option.
If your investment choices are likely to be limited to investment funds offered by the ‘Tier 1’ investment managers, then a low cost SIPP from an investment platform is likely to give you everything you need with low initial and ongoing charges.
If you are confident of your investment abilities, are looking for access to more esoteric investments and know you will use the wide range of investment options available such as direct investment into commercial property, a full SIPP may be right for you.
Your choice of pension vehicle could also change over time as either your circumstances change or the performance of your existing investments or charges levied by your provider no longer suit; transferring to a SIPP is not difficult but before doing so it is wise to ensure that the exit fees levied, or loss of other benefits by your existing provider are not prohibitive.
‘consider taking professional financial advice before opening a SIPP’
You should also bear in mind the administration charges you are likely to incur. Charges can vary considerably from one SIPP provider to another and if you only have a small pension pot, charges will reduce any profits you make or income you derive from your investments.
You should carefully consider your options, as every charge will reduce the value of your retirement fund and therefore your income in retirement.
If you are in any doubt, you should consider taking professional financial advice before opening a SIPP; many online brokers permit advisers third party access to their clients’ accounts in order to make investment decisions on their behalf.
Can I Consolidate Various Pension Plans into my SIPP?
If, like most people, you have moved employers several times during your career, you may have several small pension funds with various providers, which can make it difficult to keep track of them all.
Moving all your pension funds into one place will give you a much better overview of your investments, allow you to adapt your investment strategy as necessary and may also reduce the fees you are charged by various pension providers.
You may not be able to move all existing pension pots into a SIPP and before transferring you should check that by doing so you will not have to pay a penalty or lose any valuable benefits including guaranteed annuity rates, guaranteed investment returns or membership rights which your policy may include.
If you are lucky enough to still be a member of an old defined benefit, or ‘final-salary’ pension scheme, in most circumstances you should not move it into your SIPP, as their benefits tend to be more generous than personal pensions and your former employer bears all the investment risk.