Millions of investors have been drawn to Sipps since their introduction some 30 years ago – but not always for the right reasons.
While they are appropriate and suitable for some investors, in certain situations, they are not for everyone and some investors may find that other pension savings vehicles could be much more suitable for their needs.
As Carl Lamb, compliance director at Smith & Pinching comments: “When Nigel Lawson introduced the Sipp back in 1989 – it wasn’t a mass-market product.
"It was for a selective market, but it has been hijacked for the mass market.
"Sipps weren’t designed for that.”
And this has led to less-than-desirable circumstances for some people, as he points out: “There are people investing in Sipps who shouldn’t be, and paying more in fees than they should be, who would be better off in a personal pension.”
Sipp Investor Criteria
Every investor’s pension saving solutions will be different, depending on individual circumstances.
But with a wide range of pension options and terminology to get to grips with, including personal pensions, stakeholder pensions, auto-enrolment, defined benefit pensions, defined contribution pensions and Ssas, as well as Sipps, it is perhaps not surprising that some investors are not making the most appropriate choice.
So, who should invest in a Sipp, who should steer clear and when, and what alternatives might be more suitable?
Firstly, Sipps themselves can vary.
As well as full Sipps, typically characterised by a wide range of investments to choose from and higher charges, low-cost Sipps are also on offer, where the charges are lower, but choice of investments is more limited.
One of the factors which separates potential (full) Sipp candidates from those who might be better off investing elsewhere is risk – and not just the risk that the value of investments can go up and down.
While pensions can be challenging to understand at the best of times, a Sipp is unlikely to be right for most investment beginners, as Mr. Lamb emphasises: “Sipps are more suitable for the more sophisticated investor; they are complex.”
Scott Gallacher, financial planner at Rowley Turton also believes that they can be more appropriate for specific investors, as he explains: “Sipps can be suitable for people who need a commercial property or those who are keen on self-investing.”
And they are not for those with small pension pots, as he adds: “You need a large pension fund for a Sipp − around two-thirds of the property price, if you’re looking to invest in commercial property.
"With less than £100k to invest, you’d be sceptical about whether a Sipp was the right thing for the majority of people.”
Mr. Lamb agrees: “If people are in the accumulation phase of their pension, with less than £100k to invest, they might be better off in a personal pension. Even £100K is a bit on the low side for a Sipp.”