Conal Gregory explains how to create your own pension
Pensions are facing massive challenges. From the political debate about the age at which public sector employees can draw their pension to the poor value of conventional retirement plans that rely on lacklustre insurance companies, so many are looking for a bright alternative.
The answer is a Self Invested Personal Pension, known by its acronym SIPP. Its popularity has soared in recent years with an 80,000 estimated to have been created annually and one million such policies likely to be in force by 2015.
Many looking forward to a comfortable retirement have been shocked to learn the unvarnished truth that their company pension scheme is underfunded or that their personal pension has yielded such a poor performance.
To show how relatively easy even the average financially informed investor could outperform the dull returns from insurance companies, which continue to be eroded by excessive overheads and other charges, compare how £1,000 invested annually over 10 years has performed, revealed by Investment Life & Pensions Moneyfacts:
n with-profits £11,438 (MGM Advantage) to £14,104 (Wesleyan Assurance);
n unit-linked £11,377 (AXA) to £14,536 (Prudential).
Yet shares with dividends reinvested are up 44.8 per cent in the last decade and house prices by 86.5 per cent.
In terms of contribution limits and tax benefits, a SIPP works the same way as a personal pension or stakeholder pension. It has two distinct advantages over conventional schemes:
n investment choice is far wider;
n flexibility when taking retirement benefits with the option to take up to 25 per cent cash and drawing income on the balance rather than having to purchase an annuity.
SIPPs, like personal pensions, have several tax advantages: tax relief on contributions, fund growth tax-free (except on UK equity dividends) and up to a quarter available tax-free upon retirement. Premiums are paid net of income tax and Revenue & Customs then pays the difference to the pension pot.
Like all retirement planning, the longer the time to build up growth, the better the return. Investments in a SIPP are free of both capital gains tax and income tax.
Whilst there is no minimum age for opening a SIPP, usually 75 years is the maximum limit. You can start with fresh contributions, or by transferring existing pension plans and also by selling investments and repurchasing them within a SIPP wrapper.
The range of options available to the SIPP saver is very appealing. They include equities (both UK and foreign), gilts and other fixed income products, unit trusts and open-ended investment companies, hedge funds, futures and options, investment trusts and traded endowment policies.
Property is allowed if it is non-domestic as well as Real Estate Investment Trusts (known as REITs). SIPPs are “very often used for commercial property”, says Paul McAtominey, head of pensions at Harrogate-based financial advisers Ellis Bates.
Tim Cross, head of real estate at Yorkshire solicitors Langleys, says: “Commercial property may be seen as an attractive and affordable investment.” He says purchases can be made with funds from a SIPP – usually a third – and the balance with bank borrowing as banks find the level of security attractive.
The rent will be used to pay the interest on the loan – and any surplus in the usual way – or in further property investments. The essential point is that a SIPP allows the individual to take greater control of their retirement planning. An insurance manager with little appetite for diversity who may also be risk-averse despite the length of time before funds will be required can be beaten hands down.
There are three types of SIPP and experienced independent financial advisers can help on all three:
n Deferred SIPP: personal pension with a SIPP option which can be activated at some point but in the meantime has a personal pension charging structure;
n Hybrid SIPP: personal pension with self investment and some money in insurance company funds, typically used to deduct charges
n Pure SIPP: fully self-invested with no requirement to put any money into insurance firms. Fees usually based on work carried out, rather than total funds
On charges, ask not only about set-up and annual costs but if advice will also be given. With a hybrid SIPP, no set-up fee arises with Aegon (provided a fund supermarket is used), LV=, Scottish Life (Royal London) and Scottish Widows but £295 at Legal & General and £303.30 with Zurich Assurance (unless £140,000 is held in its funds).
Annual fees on hybrid SIPPs also vary, ranging from nil to £550 (Aegon), 0.1 per cent-0.55 per cent (LV=), £200-£375 (Legal & General, depending on investment), £200-£423 (Prudential), £335 online (Scottish Life), 0.1-0.6 per cent (Scottish Widows, depending on fund value) and £404.40 (Zurich Assurance but free if £140,000 in Zurich pension funds).
The range of full SIPP providers is large but check which investments they will allow. Alliance Trust, for instance, accepts over 1,400 funds.
Many will not accept unquoted shares or traded endowment policies.
Commercial property is not acceptable with Alliance Trust (Select SIPP), Dentons (single SIPP), Hargreaves Lansdown, Hansant (One Investment), Hornbuckle Mitchell (single SIPP), James Hay (eSIPP), Jupiter Asset, Pilling, Rathbones, SIT Savings and Westerby Trustee (Solo SIPP). It is also not permitted by Leeds stockbrokers Charles Stanley, Redmayne-Bentley or Rensburg Sheppards.
A full SIPP can be set up cheaply, even for free with Alliance Trust (Select SIPP), Aviva, AXA Wealth, Charles Stanley, Corporate & Professional Pensions, EBS Management, Hargreaves Lansdown, IPM Sipp Administration, James Hay, Jupiter Asset, Killik, Premier Pension Services, Redmayne-Bentley, Rensburg Sheppards, SIT Savings, T.D. Waterhouse, Wensley Mackay and Xafinity SIPP Services.
The only ones who also have no annual charge are James Hay, private client stockbrokers Killik and Hargreaves Lansdown (provided a SIPP bank account or fund pays renewal commission). Rates elsewhere vary considerably with £300-£500 typical.
The most expensive annual charges are with Greyfriars Asset Management (£2,000), HSBC (£800), Hansant Pensions for its Premier SIPP (£650), Pointon York (£630), Bridgewater (£600) and City Trustees for its full SIPP (£600), all plus VAT.