Retirement is an exciting phase in your life. Many retirees plan to travel the world or other have other dreams that they wish to fulfil when they are no longer tied to the daily 9 to 5 job.
Ensuring that you have enough money to realise your dreams without running out of cash in your later life is a matter of sensible planning and understanding the choices that are available to you. Investment is often an important part of the process.
So perhaps you may have heard of SIPP (Self Invested Personal Pensions) and wondered what it is all about. A SIPP is essentially a do-it-yourself pension schemes that allow you to choose exactly how your retirement savings are invested.
Unlike traditional personal pensions, where your choice is narrowed to a finite number of specific investments, SIPP allows you to take full control of how you want to invest your pension money. Almost anything from unquoted shares, ETFs, Unit Trusts to Structured Notes qualifies for SIPP investing and can be added to your pension portfolio.
What are the benefits?
It may not be prudent to have all your eggs in one basket. A SIPP enables an investor to take control of all aspects of their pension planning by giving them investment flexibility and diversification, which can otherwise be limited when compared to an insurance-based product, such as a personal pension.
A SIPP can also be a good way to bring different pensions you already have in one place in a way that can allow them to really grow.
Cost-effectiveness is also key, as many insurance-based products are percentage driven, which effectively means that as the fund grows in size, so does the cost. SIPP tend to be fee-based arrangements, so the relative cost actually becomes smaller as the fund size increases.
Who can benefit from SIPP?
A SIPP is suitable for an individual looking for maximum diversity and keen not to concentrate solely on one asset class. It’s the ideal solution for those looking for a whole-of-market advice. (Where the holder wants access to all possible investment products on the market).
Whether you find this prospect exciting or intimidating will depend on your risk appetite and investment experience because not all investors are tempted to be a DIY investor. They are taking on personal responsibility for the investments that will affect the quality of their retirement.
Comparing the charges
Until relatively recently, SIPPs have been the preserve of those with larger pension pots. The main reason for this was that the fees and charges involved were not cost-effective unless your pension pot was of certain size, effectively pricing a lot of people out of the SIPP market.
Today, there are many providers that offer low-cost SIPPs that can be managed online with lower fees and charges. However, there are still other charges you should be aware of, such as the set-up fee, annual management fee and dealing charges. Hence, if you have a relatively small amount of money to save and don’t value the extra flexibility offered by a SIPP, the overall charges could outweigh the benefits.
Aside from that, most low-cost SIPPs don’t offer expert advice. Effectively, this means you take on a greater level of risk. If you’re not savvy with your investments, your portfolio could suffer as a result.
Is a SIPP right for you?
It may be the case that you’re disillusioned with your current pension, or that you’d prefer to take the reins and have more control of your pension pot. However, a SIPP is not risk-free and to someone not used to dealing in shares or other investments, it has the potential to prove a costly mistake.
A SIPP is suitable for seasoned investors who fully understand what they are letting themselves in for. They also need to be comfortable with the risks they are taking.
If you want to invest relatively small amounts of money on a low-cost basis without any financial responsibility, a traditional personal pension may suffice.