Sipps: How to retire early on a DIY pension-Richard -Richard Evans

Sipps: How to retire early on a DIY pension

Thousands of savers have started a self-managed pension in recent months. Here's how to join them.

Savers can invest their pension in a range of assets  Photo: Howard Mcwilliam

Britain’s workers are waking up to the pensions crisis and taking matters into their own hands by setting up and managing long-term savings plans.

The number of people with self-managed pensions rose by 43pc in under two years at Hargreaves Lansdown, one of the biggest providers. Two years ago 102,000 of its customers had a self-invested pension but by March this year the number had reached 146,000.

These savers have been forced to take action to secure a comfortable future by a variety of big changes made by employers and the Government – and by the inexorable rise in life expectancy.

One of these changes is the demise of final salary pensions and careers for life, which gave many workers a guaranteed, index-linked and often generous pension without them having to lift a finger.

We are also starting to realise that we may be retired for 20 or 30 years, that the state pension is far from generous and that the new “automatic enrolment” workplace pension scheme involves such small sums, at least for now, that it is unlikely to make much difference to our income after we retire.

Finally, people have decided to manage their own savings because many can no longer afford financial advice, now that advisers charge upfront fees instead of taking a commission from the products they sell.
If you do want to start investing to build up your retirement savings, there are a number of ways to go about it. You could put money into Isas or increase contributions to a company pension, for example. But more than a million people have started a self-invested personal pension or Sipp since their introduction in 1989, although many run their Sipp with help from a financial adviser.
These plans offer a simple and tax-efficient means to save in a wide variety of investments, from shares and bonds to cash and even, for more sophisticated investors, assets such as commercial property.
Here we aim to guide you through the process of starting and running your own Sipp.

What are the advantages?

A Sipp is just a special type of pension, so you get a pension’s tax breaks. For basic-rate taxpayers the advantage of a pension over an Isa is the 25pc tax-free lump sum that you can take from the age of 55. Higher-rate taxpayers gain even more.
Choosing a Sipp offers the additional advantage of giving you control of your pension investments. You can buy and sell a wide range of assets within your pension at low cost whenever you like, normally over the internet.

How should I start?

If you are a first-time investor you’ll probably want the simplest variety of Sipp rather than the type that offers complete investment choice. But the basic ones, which are normally web-based and low-cost, still offer a huge choice of funds and shares, so you can build a balanced portfolio that suits your needs.

Who offers Sipps?

There are broadly two types of Sipp. One, more suitable for first-time investors, avoids offering esoteric investments, concentrating on funds and shares. These Sipps are normally, although not always, managed online; providers include Hargreaves Lansdown, Charles Stanley, Alliance Trust, Bestinvest, TD Direct and Sippdeal.

How can I choose the right Sipp company?

Consider the following factors: cost; how much help you will need from the company (most offer assistance by phone or email); how much research you want the company to provide to help you choose investments; and finding a website that you are comfortable using.

How much will it cost?

Unfortunately, comparing the costs of different Sipp providers is not straightforward. Some charge fixed yearly fees, others take a percentage of the value of your investments, while some charge when you switch assets. Think about the investments you will hold, how much they will be worth and how often you will change them before working out which provider will be cheapest for you.
“Don’t just look at the headline costs. Watch also for hidden costs such as charges for moving your Sipp to another provider,” said John Moret, the principal of MoretoSipps, a consultancy.
If you have a large portfolio, say more than £50,000, you will probably be better off at a company that charges a fixed annual fee or for each trade rather than one that makes its money by taking a slice of fund managers’ annual charges. Alliance Trust and Sippdeal are in the first category; Hargreaves Lansdown in the latter.

What investments should I choose?

This depends on your age, as well as your attitude to risk. The younger you are, the more risk it’s worth taking – over the long term shares tend to do better than bonds and cash, but be prepared for plenty of short-term swings.
“Long-term equity investment remains the most effective way to provide an income in retirement,” said Dominic Grinstead, the managing director of MetLife UK, the insurer.
First-time investors are always advised to buy share-based funds rather than individual shares, as this reduces this risk that you will be hit hard by the failure of one company. Experts recommend further reducing risk by buying a range of funds.
As you get older and approach retirement, it’s often a good idea to choose less risky assets. The last thing you want is to be exposed to a huge stock market crash just before you use your accumulated savings to buy an income for life via an annuity, for example.
Cash is safe, up to the £85,000 limit of the compensation scheme, but interest rates are so low that it’s hard to keep pace with inflation. Bonds are normally seen as lower risk, but many experts say prices are currently too high, thanks to distortions in the market caused by low official interest rates and quantitative easing.
Shares in stable blue-chip companies that pay decent dividends offer a good mix of resilience, income and potential for growth.
They may be especially suitable for investors who don’t want to buy an annuity when they need an income – annuity rates are currently very poor – but plan to live off the income produced by their investments instead. This option is called “income drawdown”.

What do I have to do once the Sipp is up and running?

In most cases the only thing you need to do once the Sipp is set up is monitor your investments and change them if necessary.
However, higher-rate taxpayers will need to declare any contributions to the Sipp on their self-assessment form in order to claim full tax relief, while those who make very large contributions or who have big pension pots should check that they don’t exceed annual and lifetime limits. These limits apply to aggregate totals across all your pensions, so take any others into account.
Monitoring investments is very important. “A pension is for life, it’s not a case of 'buy and forget’,” said Mr Moret, who has earned the nickname “Mr Sipp” for helping to shape the industry since its launch.
“Try to do what a professional investment manager would do, but don’t underestimate the time commitment this involves.”
Most online Sipp providers will give you a real-time valuation of your holdings.
At some stage you may want to transfer any other pensions you have, such as workplace schemes, to your Sipp – perhaps when you leave a particular employer and its contributions cease.

What about these more sophisticated options you mentioned?

“Full” Sipps allow “every investment that does not breach HMRC guidelines”, said Ian Hammond of Rowanmoor, one such company. Similar providers include Hornbuckle Mitchell and AJ Bell.
These firms generally require you to invest through a financial adviser rather than independently. As a result, you won’t need to manage them yourself over the internet.
Some of the more unusual investments you can hold in these Sipps include commercial property, as well as truly esoteric assets such as copyrights and other intellectual property, said Mr Hammond. Full Sipps cost more than the basic variety.
There is a list of all Sipp providers on the website of their umbrella group, the Association of Member-Directed Pension Schemes (ampsonline.co.uk).

I don’t want to use the internet. What are my options?

Some providers of “basic” Sipps will allow you to manage your Sipp by phone, although they may not advertise the fact. Hargreaves Lansdown, for example, lets you do everything over the phone or by post.

What are the drawbacks of Sipps?

Costs can be higher than for personal pensions, especially if you choose the wrong firm for your needs. The ease of trading can encourage Sipp owners to switch investments too often, potentially frittering away their savings in dealing charges.

What are the alternatives?

It’s worth asking if you really need a Sipp. A personal pension could be better if you are happy to leaves things to an insurer that will invest your money in a fund that simply tracks the stock market, or one that owns a range of assets to reduce volatility.
But Tom McPhail of Hargreaves Lansdown said: “Eventually all non-final-salary pensions will look like Sipps, as they offer all the advantages of other pensions with none of the drawbacks.
“The crucial magic ingredients are to present information regarding investment choices cleanly and effectively and to support the investor with easy to use administration systems.
“Provided that you have these two elements, a Sipp knocks spots off any other kind of pension.”

Culled from the Telegraph