How to effectively manage your pension fund
More and more investors are running their own retirement funds thanks to self-invested personal pensions or Sipps.
If you want to take charge of your own pension savings, rather than simply hand your money to an insurance company, the conventional wisdom has been to start a self-invested personal pension, more commonly known as a Sipp.
These do-it-yourself pensions allow savers to choose where their money is invested, and offer far greater freedom. Rather than select from a narrow range of insurance company funds, Sipps offer a panoply of investments, including bank deposits, bonds, shares, pooled funds such as unit and investment trusts, open-ended investment companies (Oeics), exchange-traded funds (ETFs), commercial property, hedge funds, foreign currency and warrants.
But this simplistic definition ignores the sea change that has affected pensions in recent years. There are now a variety of Sipp products, including hybrid or “off-the-shelf” Sipps (offered by insurers) and low-cost execution-only versions, which as the name suggests are cheaper but offer more limited investment options.
At the same time, new technology has enabled investors to run personal pensions via a “platform”, such as a fund supermarket, giving them access to a wide choice of investment funds – often at a fraction of the cost of a traditional Sipp.
Recent research certainly indicates that some Sipp holders aren’t making the most of their investment options, so they may be paying far more than they need for their pension wrapper.
One in four Sipp customers has the vast majority of their pension (more than 90pc) in unit trusts and Oeics, while 70pc don’t invest in ETFs and almost half (45pc) do not use their Sipp to invest in equities directly.
In most cases these plans have lower charges than “full” Sipps. But if the bulk of investors’ money remains in the insurer’s funds, customers may be paying more for the Sipp wrapper – compared with the company’s personal pensions – even though their money is primarily invested in the same basic funds.
The Financial Services Authority has previously investigated whether Sipps were being sold with appropriate advice, and has cautioned some advisers against “churning” existing pensions into Sipps to benefit from higher commission payments.