SIPPs are becoming a more and more popular method in pension saving these days with a number of pension investors wanting to take control over how to accumulate their own pension funds.
The main driving force behind the popularity of SIPPs is the freedom to invest in one of the most open and tax-efficient frameworks available. Investors are free to contribute while having as much or as little involvement in the control over their investment strategies as they wish.
While the idea of having more control over your pension may appeal to many, identifying the best product suited to your needs can be off-putting, especially considering there are many companies that currently provide their own SIPPs, each one offering a different level of investment classes and, with it, charging structures. Seeking advice from a qualified financial professional is essential in helping you scour the market to find the best for you.
How to start
Your first priority should be to decide upon an investment strategy for your SIPP. You should consider what investment methods best suit your knowledge, requirements and experience. SIPPs allow you to invest in a wide array of investment classes, ranging from commercial property to shares. Also, you should consider the terms of certain investments and decide upon how frequently you may wish to change your investment strategy, if at all.
It is recommended that you select your investment strategy before selecting your provider, as you can then select a provider that is more favourable to your needs. If you regularly buy and sell shares you should look for a provider with low transaction fees. If you do not look to invest in commercial property there is no need to select a more expensive commercial property SIPP provider.
Because some providers have no fixed set-up or annual fee, SIPPs are ideal savings vehicles and can be set up for as little as GBP50 per month.
In recent years a number of low-cost online providers have offered investors the opportunity to manage their investment choices without the use of a financial advisor. Although this may be beneficial to the more sophisticated investors, it is always recommended that you seek proper financial advice before embarking on such a policy, even if you decide to go solo on your investments in the future.
These low-costs providers generally only provide investments in funds, shares or cash and do not offer other investment classes such as commercial property or gilts. Low-cost providers don’t generally charge for someone to set up a plan and most forgo an annual fee on the SIPP wrapper. However, if you are looking to purchase and sell shares yourself, there may well be dealing costs involved. These costs can vary depending on the provider.
SIPP providers sometimes give discounts on initial charges or annual management fees for savers looking to put their money into investment funds.
Two types of SIPP to be aware of is the deferred SIPP and the Hybrid plan (a Hybrid SIPP is a combination of a deferred SIPP and a conventional SIPP). A deferred SIPP is a pension plan written under a SIPP Trust. A hybrid SIPP offers part of the investment into a deferred SIPP structure, with the residual fund being invested in the normal self-invested style.
Deferred SIPPS commonly offer a wide range of investment powers without the associated high charges. There are no restrictions on the amount of internally managed insured funds that you have to contribute to prior to being allowed to invest in externally managed funds.
Typically, you can find low-cost SIPPs that offer fund-based investments for the same cost, if not cheaper than most conventional pensions. The annual administration charge is in the range of GBP100 to GBP200, with deferred SIPPS usually costing around the same. These administration charges can rise if you wish to start investing in a basic selection of assets and can reach GBP400 if you wish to start investing in other assets, such as property.
The ‘full’ SIPP allows you to invest in nearly everything, from commercial property to cash and everything in between. Investing in commercial property is a popular venture by many businesses, where directors can form a syndicate to help purchase their offices or lots. The SIPP wrapper helps prevent Capital Gains Tax and directors can collect their rental income tax-free which is added to the pension fund giving substantial growth. Generally, ‘full’ SIPPs cost in the region of GBP400 to set up with an annual management fee of anywhere between GBP500 to GBP1K. To simplify, the more you invest, the more it will cost.
As explained earlier, it is vital to consider what type of SIPP is appropriate for your investment strategy. Paying a higher fee for a ‘full’ SIPP when you are not utilising most of its investment methods would work against you, whereas you should also note that not all providers will offer the same features, while giving consideration to your current portfolio and what you may want it to include in the future.
As with all financial matters, we would strongly recommend that you undertake financial advice before reaching an investment decision. With such a wide number of pension providers and plans in the marketplace it is vital to pick one which suits your needs and budget.
When selecting a financial adviser you should consider the level of control you want them to have over your investment. They should be able to update you regularly on the performance of your funds as well as detailing what services are available, such as regular meetings, online reports and the actual handling of investments.
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