There are now approaching one million Self Invested Personal Pensions (SIPPs) in existence and the number is growing each year.
Given the increasing popularity of SIPPs what are the key advantages to this type method of retirement planning?
A SIPP can give you far greater control over how the money within your pension is invested. For example a Personal Pension or Stakeholder Pension can only buy funds, whereas a SIPP can invest in a far wider range of assets including commercial property, deposit accounts, shares, ETFs, gilts, corporate bonds, as well as funds.
This is probably the single biggest reason people use SIPPs, fed up with other people managing their money and charging large fees for doing so, we are seeing more and more people wanting to take control of their own retirement planning.
For larger funds the fixed fees charged by most SIPPs can work out cheaper than a more traditional Personal Pension or Stakeholder Pension, which generally base their fees on a percentage of the fund, meaning costs rise in line with the size of your pension.
3. Commercial property
One of the most popular assets to buy within a SIPP is a commercial property. Many small business owners have bought their business premises within their SIPP, effectively becoming their own landlord and paying rent to themselves rather than a faceless third party.
Buying commercial property in a SIPP gives many business owners that feeling of control we talked about at the start of this article; they want to know where their pension is invested and what better way that occupying their own investment! There are of course disadvantages to this route though, particularly the lack of diversification and over reliance on one single property to fund retirement.
4. Online trading
Most SIPPs are opened by DIY investors, that is, people who are not taking financial advice. DIY investors usually want to be able to trade cheaply and quickly online, this is usually not possible with a Personal Pension but it is with a SIPP. Hargreaves Lansdown, Sippdeal and Best Invest are all excellent examples of SIPPs which DIY investors use to trade online
5. Deposit accounts
Many people want to reduce the level of risk they are taking with their pension, perhaps because they are approaching retirement, or have simply had enough of the roller coaster rise that is the stock market and they want something safer and less volatile.
If you are using a Personal Pension and you want to invest in cash or deposit accounts your options are limited and currently the return is generally less than 1% per year. However, just like you do with your own savings, a SIPP can open deposit accounts, which pay a far higher rate of return than the cash options offered by a Personal Pension.
SIPPs are not right for everyone, and there are disadvantages, however for those people wanting more control over their retirement planning, looking to trade online or who want to invest in anything other than funds, the benefits of a SIPP should be considered be considered very carefully.
Phillip Bray is a respected financial write for Investment Sense, who offer financial advice in Nottingham. Phillip has been published extensively on a variety of retirement topics including SIPPs, Annuities and the new Flexible Drawdown rules.