SIPPs: Taking your first steps

What is a SIPP?

The acronym stands for self invested personal pension. Like with a personal pension, SIPPs come with attractive tax benefits. Contributions are tax-deductible and investments within the SIPP are income and capital gains tax free.

Unlike a personal pension, which may be limited to a range of funds determined by your pension provider, a SIPP is designed so that you can invest wherever you like, including individual shares, funds, bonds, derivatives and even commercial property.

Technically it is possible to invest in residential property as well, but the tax treatment for this makes it a poor choice.

The scope of what you can include in your SIPP varies according to how much you’re willing to pay for it; the more expensive the scheme, the more flexible it is likely to be.

Tim Cockerill, head of collectives research at Rowan Dartington, said: "In a sense it’s a personal pension that allows you to do what you want. That’s a big attraction for me. You may well have some freedom if you go down the straight personal pension route, but you won’t have the whole universe to choose from."


Why would I want one?

Control and flexibility are the key issues. "The great thing about SIPPs," continued Cockerill, "Is that they give you a lot of flexibility. There are straightforward SIPPs as well as those which allow you to hold physical property, like a shop for example, and that flexibility is very suitable for some people."

FE Trustnet’s special report on the subject found many investors were angry that, after many years of saving, their pensions hadn’t performed as well as they thought they should have.

The main benefit of a SIPP against this backdrop is accountability.

While your personal pension is managed by somebody you’ve never met, and you have no say over what that manager does with your money once you’re in the fold, you can change the shape of your investment exposure whenever you choose to, or ask someone you trust – your adviser, who you will have appointed personally – to do so for you.


Assuming I wanted one, what would I put into it?

Your age is the determining factor here, according to most commentators, and for investors just starting out with their pension that means high risk, high returns.

Aggressive funds make sense at this stage according to Cockerill: "Without a doubt ultimately you’ve got one objective at that age and that is to grow your pot as much as you can. You have to take the risk to get the potential for greater gains so I’d suggest that type of investor needs to look at higher risk."

"Emerging markets, Asia Pacific, small caps too would sit well alongside some core funds with FTSE 100 exposure. You’d need to be prepared for volatility though."

Cockerill believes investors should aim for a final portfolio containing up to 20 funds, building their investments a fund at a time.

"The aim is to build your portfolio as fast as you can. By the time you are done it is going to err towards 20 funds because ideas come along and you pick up on them. A mix of funds like this is good because some parts of your portfolio will do nicely when other parts are not doing so well, and vice versa, you won’t have the same strategy in every part of your portfolio."

Cockerill thinks a young investor would be well placed to limit their exposure to core, low-risk funds to only around a fifth of the total portfolio.

"At this age you want the majority in your big bets. You’ve got time on your side – look at how much the world has changed in a decade; how far emerging markets have come – those are the areas where growth will be greatest and that’s where the majority of your portfolio should be."


What are the disadvantages of a SIPP?

SIPPs can be expensive. They are bespoke to the buyer, so they cost more to set up – and the more flexible they are, the more expensive they become.

"Nobody else in the country will have the same investments in their pension as I have in mine," said Cockerill, "Whereas a packaged product will have a lot of people opting for the same thing, so they can be run on an industrial basis."

"Costs are something that you need to bear in mind. They vary, there may be a start-up fee, a quarterly fee, it’s one of those areas where it really helps to get some advice."

Cockerill thinks investors need a significant amount already in their pot before they make the plunge. "For a lot of people what you might find is that it makes more sense to start saving in a low-cost personal pension, then when that reaches a sufficient level you make the transfer to a SIPP."

Cost is not the only disadvantage. SIPPs make it possible for you to control your own investments without the need for any advice at all. Whilst this may be an attractive idea for a confident 20-something with the world at his or her feet, it is a choice that shouldn’t be taken lightly.

As we saw in our special report on pensions, IFAs and pension providers get hammered by investors when their decisions don’t pay off in the long-term, even though the majority – one must assume – are doing their best.

Successfully managing an investment portfolio is not easy, so staring at a stunted pension pot in 40 years' time, and knowing that you have nobody to blame but yourself, is a scenario you must be ready to face if you choose to take the job on yourself.