Back

Pension not performing?

November 14, 2004

DIY schemes are no longer the preserve of the rich, writes Helen Pridham

This article appeared in The Observer

Most of us have little to do with our pension savings, leaving the choice of investments to someone else - either the trustees of our company scheme or to an insurance company. But there is another, more pro-active, way.

Self-invested personal pensions (Sipps) allow you to decide what investments should go into your retirement fund. An increasing number of people, disillusioned with the performance of conventional pension schemes, are now turning to these.

Sipps, once the preserve of the wealthy, are becoming increasingly accessible to smaller investors as competition grows among providers, forcing charges down.

They are expected to become even more popular after 2006 when the pension rules change to allow investors to include buy-to-let properties. At the same time, the simplification of the pension contribution rules will also allow members of company pension schemes to set up these schemes in future.

To understand how Sipps work, you need to think of a pension scheme as a tax-efficient 'wrapper' for savings and investments. With a Sipp, you get the tax concessions you would with an ordinary pension - income tax relief to boost your contributions, virtually tax-free returns on your investments and a tax-free lump sum when you take your retirement benefits.

You still buy the pension wrapper from a pension company, which does all the necessary administration on your behalf. The difference is, you can tell the company which investments to buy. Investments currently permitted to be held in a Sipp include shares, gilts, unit trusts, investment trusts and commercial property.

But Gemma Watson of advisory firm Chartwell says that although a lot is talked about this option, 'in practice, relatively few people invest in property, as the rules are cumbersome and it can be expensive'.

It is not permitted, for example, for the pension fund to buy property already owned by the investor or from 'connected parties' such as other family members. The rules for investing in residential property have not been clarified but could prove equally strict.

According to Helen Symonds of independent financial adviser Punter Southall Financial Management, Sipps are currently popular with businessmen who have moved from job to job and amassed a number of different pension plans along the way. By using a Sipp, they can consolidate their plans so they are easier to administer, and gain greater control over the investment strategy at the same time. Although they will often delegate the running of the investment portfolio to an adviser, they will be able to be more closely involved than with an insured scheme.

The potential disadvantage of Sipps is that they can be expensive. Charges typically include initial setting-up costs of between £200 to £500, an annual management fee and the costs of buying and selling investments.

Unless you have the time and expertise, you may also need to pay an investment adviser. All this can double the cost you would pay for an ordinary personal or stakeholder pension, so you have to feel confident of achieving significantly better investment returns than you would from a conventional pension plan.

'Paying these extra costs makes sense only if you have a large enough pension fund and you are going to use all the bells and whistles a Sipp offers,' says Lesley Creffield of advisory firm Morgan Peterson. She recommends a minimum pension fund to start with of £50,000. At Punter Southall the recommended minimum is £150,000.

But there are cheaper Sipp deals available and more are being launched all the time. Many financial advisers see Standard Life's recent announcement that it is launching a new Sipp as a sign that the market is going to broaden out considerably.

David Higgins of I-SIPP, a firm of independent financial advisers, says it is all about finding the right type of Sipp: 'We specialise in matching clients with the right Sipp deal to meet their requirements. There are around 50 Sipp products available at the moment and they basically fall into two categories: the all-singing, all-dancing type, and those which provide a more limited range of investments, such as shares and investment funds.

'These may be all an investor wants, so there is no need for them to pay for a fully blown Sipp. On the other hand, if you are paying high fees you need to make sure it does what you want it to. We recently had a client who wanted to buy a commercial property in Bulgaria. Even the largest Sipp providers do not necessarily consider property outside the UK.'

If all you want is a low-cost Sipp that allows you to choose your own shares, unit trusts or investment trusts, there are providers such as Alliance Trust Savings and Baillie Gifford, and internet providers such as Comdirect and Sippdeal, where charges are transaction based. If you do not turnover your investments excessively, these Sipps are likely to cost little more than an ordinary pension plan.

'All the rent is going to my retirement'

Fred Bassnett, 53, was one of the first converts to a Self Invested Personal Pension (Sipps). In 1990 when he left his job as a director of department store to become a consultant specialising in retail and consumer goods for the UK and North American markets, he decided wanted his own pension provision.

He says: 'I had been a member of a final-salary occupational scheme, which I knew offered secure benefits, but as I was branching out on my own, I decided to switch my pension out of my ex-employer's scheme. My financial adviser, Morgan Peterson, recommended a Sipp administered by Sun Life, now Axa.'

Two years later, his advisers suggested putting part of his pension fund into commercial property.

'I thought it was a great idea. Property prices had bottomed out, so I felt the timing of the investment was probably ideal.' Mr Bassnett used a 30 per cent deposit from his pension fund and a 10-year commercial mortgage to buy an office building. A 10-year lease was signed with the professional firm that was renting the building.

'Their rent covered the repayments on the mortgage, which has now been cleared. At the last valuation, the building was worth around three times what I paid for it and all the rent is now going into my pension fund.'

The rest of Mr Bassnett's pension fund was invested in a mixture of shares and investment funds.

So far he has left the management of that portion to his financial advisers, but having recently attended an investment seminar on one of his visits to the US, he is planning to become more involved in the investment decisions.

'I am also intending to look at the possibility of investing in residential property when that option becomes available,' he adds.

His experience of Sipps has been a positive one. 'Moving from an occupational pension into a Sipp was certainly right for me and has boosted my prospective pension substantially.'

Top