SIPPs, or Self Invested Personal Pensions, have opened up a huge range of ways to make retirement cash work harder since their launch 25 years ago.
Since the first SIPP was launched in 1990, the number of people using them has increased exponentially – according to data from Fidelity, approximately 900,000 people in the UK today are using a SIPP to take control of their pension.
Maike Currie (pictured), associate investment director at Fidelity Personal Investing, said: “SIPPs weren’t an instant success. But as investors’ knowledge and understanding of these vehicles grew, many realised the attractions SIPPs offer.”
“Unlike an annuity, you don’t need to surrender the capital value of your pension pot to an insurance company. You take control of your pension’s assets, can draw an income from your pot and still have the flexibility to leave your pension to your nearest and dearest. In the space of 25 years, SIPPs have revolutionised the pension’s landscape and the new retirement freedoms make these vehicles even more attractive."
In light of the 25th anniversary of the SIPP, Currie highlights six key tips to make the most of your pension pot.
Consolidate your pots
When it comes to retirement savings, it’s not uncommon for people to have pockets of cash stored away in various pension plans they have started throughout their working life.
An obvious way to put all these into one place – and have a greater freedom in how the cash is invested – is to consolidate them into a SIPP.
“A SIPP can be a useful vehicle for people who have accumulated several pension pots over their working career from different employments,” Currie said.
“With a SIPP you can consolidate all these pots in one place. Bringing together your pots simplifies the task of managing your pension and usually means a substantial saving on fees.”
However, she warns that reading the small print is vital as there can be costs involved when moving a pension.
“Some policies have penalty charges for moving pots before the retirement age you selected,” she added.
Consider the costs
As with any service, not all SIPPs charge the same so it’s important for investors to find the most cost-effective option when picking a provider. There are some expensive options on the market, so some time and effort examining the costs can be well worth it over the long term.
“SIPPs come with a multitude of different charging structures, so make sure your provider has a transparent and simple framework in place,” Currie explained.
“Take the time to ensure you understand the costs involved – always know what you are paying for. Your choice of SIPP provider is also very important, take a good look at the financial strength of the company, its experience and internal expertise.”
Of course, the decision should not come down to cost all. It’s best to make sure than all the extra services and features that you want to make it easier to manage your SIPP are including, so the cheapest option might not always be the best.
Choose the right investments
This is a far more complex consideration to take into account, especially seeing as there is no ‘right’ investment.
However, there are investments that are right for the individual – there are numerous factors to consider including charges, risk appetite, asset class, size and the aim of the investment vehicle.
“Your SIPP can be invested in a range of asset classes – make sure your SIPP portfolio is properly diversified and that your asset allocation matches your risk appetite and income goals,” Currie said.
“The term ‘SIPP’ can cover a wide range of options from the basic online services to fully flexible bespoke schemes. Note that the wider the range of investments offered, the more expensive the SIPP tends to be.”
Those who are new to investing or don’t want to take care of the asset allocation and fund selection elements of their portfolio might want to consider a multi-asset or multi-manager fund, which act as ‘one-stop shops’. Highly rated products are run by companies like Jupiter, Schroders and F&C.
But those wanting to choose funds themselves have a vast range of single strategies to choose from. UK equity income will often be a starting point and popular funds are offered by Woodford Investment Management, Threadneedle, Artemis and Invesco Perpetual.
However, there are funds covering almost every country and asset type so investors have limitless ways to build a diversified portfolio that suits their exact needs.
Beware of SIPP fraudsters
“Pension fraud is on the rise, and with consumers keen to access their monies, fraudsters are targeting this demographic with promises of immediate cash or fantastic investment opportunities,” Currie warned.
“Be wary of alternative investments marketed by unregulated firms and always check whether the investment is regulated in the UK by the Financial Conduct Authority. Remember the golden rule: if something seems too good to be true, it usually is.”
Currie adds that if you are in doubt, you should either call your provider or speak to Pension Wise, a free and impartial government service, to double-check your decision.
Understand your income options
Currie points out that it will become increasingly common for pension investors to choose to draw an income directly from their pension pot rather than buy an annuity, following the recent overhaul of the system.
“It’s important to understand the different options and the risks involved,” she said. “An annuity can provide you with a guaranteed income for the rest of your life, but with annuity rates at record lows, income drawdown may offer better value for some.”
“With income drawdown your pension remains invested and you draw an income from it. The appeal of drawdown lies in the greater investment control it gives you over your pension capital, you can tailor your retirement assets and protect against inflation.”
