Is a SIPP right for you?

The market is awash with DIY penion wrappers promising greater flexibility and functionality, albeit at a cost. Faith Glasgow explores whether it's really worth paying more for bells and whistles.

Looking for a personal pension? Confused about the plethora of choices on offer and how they really differ from each other?

Unsure whether you need the 'added functionality' of a self-invested personal pension (SIPP), rather than a straightforward personal pension product?

It's hardly surprising.

What is a Sipp Pension? Sipp have been around for more than 20 years now, and for much of that time, according to Tom McPhail, head of pensions research at Hargreaves Lansdown, there was "clear blue water between the wide range of investments on offer through a SIPP wrapper, and the restricted range of largely in-house funds available from the personal pensions provided by insurance companies".

There was a marked difference in the pricing of the two types of pension too. "SIPPs were designed specifically for high-net-worth individuals, often businesspeople wanting to hold individual equities and commercial property in their pensions, and they involved lots of fees," McPhail adds.

But the market has changed dramatically in recent years. At the bottom end, insurance companies have been expanding and making their traditional personal pension fund ranges more 'flexible'.

A growing number, including Scottish Widows, Standard Life and Aegon, also now offer their own products badged as SIPPs.

Some comprise a wide range of investment funds (1,000 to 2,000) available via a fund supermarket, supplemented by a few added extras - an external cash account, a sharedealing facility, in some cases a panel of discretionary fund managers who'll run your portfolio for you if required.

Others are muscling in on top-end 'full SIPP' territory: Legal & General bought property-specialist SIPP provider Suffolk Life two years ago, while Standard Life is building up its own property capabilities.

Meanwhile, established SIPP providers such as James Hay and AJ Bell have expanded 'downmarket' to cater for demand from those investors wanting control and flexibility over their own pension portfolios, but not interested in the complexity or high costs of commercial property, structured products, hedge funds or other relatively sophisticated investments.

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The result is a broad and complex spectrum of mainstream personal pension products, some labelled as SIPPs and others as personal pensions.

What's right for you?

At James Hay, business development director Richard Mattison argues that only fully comprehensive products merit the SIPP label.

"The term SIPP is not appropriate for low-cost products, because they don't allow access to every type of asset permitted in a pension by HM Revenue & Customs," he explains. But as things currently stand, it may crop up attached to a wide variety of pension products.

So how should pension investors decide what's most appropriate for them? The two central issues are asset choice and cost.

At the top of the spectrum, full-service SIPPs allow investment through assets traded on any recognised stock exchange worldwide, as well as structured products, derivatives, hedge funds and, most significantly, commercial property.

They may also allow more esoteric assets, such as traded endowments and gold bullion.

Commercial property is a popular option for business owners, who are able to buy and hold their own premises very tax efficiently within their pension.

Tax relief on pension contributions helps boost the capital available to purchase the property, and it's also possible to borrow up to 50% of the pension fund value to invest.

Once the property is held within the pension fund, rent is paid to the pension free of tax, and if it is sold within the pension scheme, the proceeds are not liable tocapital gains tax.

But full SIPPs come at a price: expect a set-up fee of £300 or £400 and annual charges of around £800, as well as various additional SIPP expenses connected with the purchase and ownership of commercial property.

As Patrick Connolly, head of communications at AWD Chase de Vere, emphasises: "There is little point in paying these extra charges if you are not intending to use the extra functionality."

For competent investors interested in selecting, monitoring and managing their own portfolios but content to stick with relatively mainstream investments, there is a wide range of much cheaper online/phone-based 'fund-based' SIPPs offering a broad choice via a fund supermarket, supplemented in many cases by other investments such as shares.

It's worth finding a provider catering not only for your current investment preferences but also for the possibility that in years to come you might decide to branch out into other investments.

The choice offered within a low-cost pension labelled as a SIPP can vary considerably, so you need to do some homework or take professional advice.

The simpler option

But investors who don't need or want such a vast choice of funds and are not bothered about actively managing their fund portfolio – who basically just want to tuck a regular contribution away into some decent funds each month – may be better off setting up a personal pension from an insurance company offering a more limited range (often known as a hybrid SIPP).

Moreover, there may be potential to increase flexibility in years to come, as some of these personal pension schemes have a SIPP capability involving more choice if you want it.

Charges are the other key consideration, though it can be hard to make direct comparisons. "Personal pension charges have typically been bundled, with a single annual management charge of up to 1.5%, but the components – wrapper, funds, advice – are increasingly being unwrapped and charged separately in the interests of transparency," explains McPhail.

SIPPs don't bundle their charges so it's a matter of adding up any set-up, dealing, administration and underlying fund costs. But for fund-only investors, low-cost SIPP products may work out as cheap or cheaper.

For instance, on SIPPdeal, Hargreaves Lansdown and James Hay's E-SIPP there's currently no set-up or annual wrap charge for fund investors, so the only costs are the annual management charges of the funds themselves (which vary considerably).

You may pay additional annual administration charges if you want to invest in direct equities – for instance, Hargreaves Lansdown charges 0.5% of the value of the share portfolio, capped at £200; but again there's no annual charge from SIPPdeal.

Clearly, at the fund-oriented end of the personal pension spectrum, it's not so easy to make direct comparisons. A specialist IFA will be able to help: many now use low-cost "wrap platforms' such as Transact for their clients, which give access to a full range of funds, shares and exchange traded funds.

"Even with professional advice fees on top, the total costs will usually be lower than the 1.5% personal pension alternative, for much greater flexibility and choice,' concludes Alan Smith, chief executive of Capital Asset Management.