Self-invested personal pensions (SIPPs) are great if you want to build your pension pot on your terms and use your experience, or that of a trusted account manager, to grow your wealth ahead of retirement. However, there are some considerations to keep in
mind.
By definition, a SIPP is a form of personal pension that’s designed for individuals who want to take more control over their retirement savings. This means that if you’re an experienced investor or are somebody with the time to commit to building your pension
investments, self-invested personal pensions offer plenty of advantages.
In recent years, more Britons have embraced SIPPs, with
more than £205 billion in assets held among 1.7 million UK residents in self-invested personal pensions.
However, not all SIPP holders are taking full advantage of the benefits of self-invested pensions. According to a survey of SIPP investors, only 37% claimed that they had enough time to devote to the running of their personal pension, just 45% said they
understood the charging structure of their provider, and 15% of DIY investors suggested that they were likely to appoint an adviser within the coming year to help with their SIPP.
Despite this, there are many great advantages of managing your own SIPP, so let’s take an honest look at the pros and cons of private pensions and how they could suit your individual financial goals:
Pros of SIPPs
There are plenty of reasons why more UK adults are choosing SIPPs as their preferred way of investing ahead of retirement, with the lure of greater control and flexibility among the many advantages
to SIPP investing:
Full Control
Crucially, with a SIPP, you can take full control of your retirement. While more traditional state pensions and workplace schemes are made on your behalf without you having much control over what you’re investing in, self-invested personal pensions offer
access to a wide range of investments that can better align with your risk appetite, financial goals, and values.
You can also opt for a level of control that suits your ability to manage your SIPP. Many digital platforms will offer you the option of fully controlling the assets within your portfolio, or you can simply choose your preferred investment style, which generally
ranges from ‘cautious’ to ‘adventurous,’ and allow a manager to do your work for you.
This level of control can also bring your ethics into consideration, where you can invest in industries and stocks that are close to your heart and avoid others that you don’t agree with.
Better Tax Relief
If you have a workplace pension, you’ll need to contribute at least 3% of your pay, which is topped up by your employer and the government, depending on your contract or workplace policy. With a SIPP, however, you can instead choose the exact amount you
want to contribute at any given time, up to your pension annual allowance.
This once again provides greater control over how you invest your money ahead of your retirement and opens the door to more focused pension savings.
With SIPP accounts, you opt in for a 20% tax relief from the government on your personal contributions, meaning that you can build your tax efficiency in a more effective way.
Investment Flexibility
If you’re planning to take full control over your SIPP, then you won’t be short of options when it comes to the assets you can invest in.
When using a self-invested personal pension, you can incorporate shares into your portfolio as well as funds and even gilts and corporate bonds. These assets can provide a fully diversified portfolio that features added resilience in different economic conditions.
Cons of SIPPs
Despite their clear advantages for many pension savers depending on their retirement goals, SIPPs also come with some disadvantages depending on your saving expectations:
Fees can be Higher
One challenge that SIPP investors may struggle with is the more complex fee and charge structure that some may find complicated.
When saving with a SIPP, you’ll need to keep an eye out for a platform charge, which may be deducted on a monthly, quarterly, or yearly basis. There’s also likely to be selling and buying fees for the stocks you add and remove from your pension pot.
If you invest in funds, you’re also liable to pay a fund manager or management charge, which could rise as high as 1%.
Additionally, transfer out fees could come into play if you’re planning on transferring your investments to a different provider. You’re also likely to face income drawdown charges, which are costs to take out your money and could amount to anything up to
£300 for the initial setup and then up to £150 per year in ongoing charges.
Taxes on Withdrawals
While SIPPs carry plenty of tax advantages, which also stretch to allowing you to
take out 25% of your personal pension tax-free upon retirement, the remaining 75% is taxed as income when withdrawn.
With the prospect of higher fees in play, it could mean that the remaining three-quarters of your pension sees far less profitability in real terms compared to alternative pension plans.
You’re on Your Own
The greatest strength of SIPPs can also be seen as a disadvantage, and in having full control, you also have nobody else to blame if things don’t go as hoped.
Taking investment decisions without professional advice may mean that your pension is more vulnerable to risk, so you should only take on a DIY self-invested personal pension to manage yourself if you’re completely confident that you know what you’re doing.
If you feel that you’re struggling to match your benchmarks or that your SIPP is more time-consuming than you first thought, it’s easy to switch to a SIPP provider that has an in-house investment team to manage it for you.
Getting the Most From Your SIPP
There’s a reason why UK residents are increasingly turning to
SIPPs to build their pension pot. The greater flexibility and control provided by self-invested personal pensions are helping more investors than ever to save for their retirement on their terms.
While this can be a major advantage to experienced investors who want a more hands-on experience with additional tax perks, others could struggle with time constraints and fees that eat into their profitability.
There’s no right or wrong way to manage your pension ahead of your retirement, but for many skilled investors, SIPPs can provide strong advantages that boost their wealth more effectively over time.
