Is Self-invested Personal Pension (SIPP) right for you?
hile SIPP’s are appropriate and suitable for some investors, they are not suitable for everyone and some investors may find that other pension savings schemes could be much better suited to their circumstances.
There are people investing in Sipps who shouldn’t be, and paying more in fees than they should be, who would be better off in a UK Personal Pension.
Sipp Investor Criteria
Each investor’s pension saving solutions will be different, as it will depend on individual circumstances.
With an increasing range of pension options and technicalities to understand, including personal pensions, stakeholder pensions, auto-enrolment, defined benefit pensions, defined contribution pensions and Ssas, as well as SIPP’s, it is not unforeseen that some investors are not making the most appropriate choice.
Who should invest in a Sipp, who should steer clear and when, and what alternatives might be more suitable?
There are different types of Sipp.
As well as full Sipps, which are typically characterised by a wide range of investments to choose from and higher charges, low-cost Sipps are also on offer, where the charges are lower, but choice of investments is more limited.
One of the aspects which distinguishes potential (full) Sipp candidates from those who might be better off investing elsewhere is the risk element and not just the risk that the value of investments can go up and down.
Sipps are more suitable for the more knowledgeable investor as they are complex or they can be suitable for people who need a commercial property or those who are keen on self-investing.You need a large pension fund for a Sipp − around two-thirds of the property price, if you’re looking to invest in commercial property. With less than £100k to invest, you’d be doubtful if a Sipp was the right solution for the majority of people.
A potential secondary issue of Sipps
On some occasions, Sipps also have an unexpected secondary issue.
As they are characterised with freedom of choice, complexity and larger investments, making them appear particularly alluring to some investors. However, some of these investors could be better off saving their pension in a different less costly and less complicated more traditional pensions savings vehicle.
Some investors also underestimate the level of investment knowledge required for a Sipp. Some people are overconfident about Sipps, they say they understand them but they don’t have the knowledge they require to use them effectively.
The cost of a Sipp
There are some other considerations why investors should look at alternatives to Sipps. For example with a personal pension, with a mainstream provider, it’s a case of sending your form and it is done. It takes longer to open a Sipp and there is potentially more hassle. The costs involved can also make a difference as with fixed costs, the more you have to invest the more reasonable priced they can be.
If you don’t need the flexibility and options that Sipps can provide, and if your pension is in the accumulation phase, you may be better off in a personal pension or a stakeholder pension.
Charges as one of the potential disadvantages of Sipps, for some investors as the generic charges on a Sipp tend to be higher than on a personal or stakeholder pension, or in an auto-enrolment scheme. If someone were investing a relatively small amount, the charges could seem high. We would suggest SIPP investors may normally need to be focused on having a reasonable amount of funds to start with, and on taking a more aggressive stance to investment. Alternatively, accumulation in a pensions vehicle with lower charges, then reconsidering a SIPP at a later stage, could be a more suitable option.