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.”
A potential side effect of Sipps
On some occasions, Sipps also have an unexpected side effect.
As they are associated with freedom of choice, complexity and larger investments, a by-product of their features is that they may appear particularly alluring to some investors.
But some of these investors could be better off saving their pension in a different – less costly and less complicated − pensions-savings vehicle: “Most people who enquire about a Sipp don’t need a Sipp,” says Mr. Gallacher:
“In some cases, having a Sipp is a ‘vanity’ thing, in that some people might think that Sipps are a ‘sexier’ form of pension saving because they can choose their own investments.”
Some investors also underestimate the level of investment knowledge required for a Sipp, as Mr. Gallacher observes: “Some people are overconfident about Sipps – they say they understand them but they don’t have the knowledge they should have.”
“But if they do, they can be the right investment,” he confirms.
Considering the cost of a Sipp
There are some other reasons why investors should look at alternatives to Sipps, as Mr. Gallacher explains: “Sipps are potentially more complicated.
"For instance, with a personal pension, with a mainstream provider, it’s a case of sending your form and it’s done. It takes longer to open a Sipp and there is potentially more hassle.”
The costs involved can also make a difference, he adds: “With fixed costs, the more you have to invest the more reasonable they are.”
Mr. Spink believes that some investors may be out of pocket from investing in Sipps, as he comments: “Some Sipps can be expensive.”
He adds: “If you don’t need the flexibility and options that Sipps can provide, and if your pension is in the accumulation phase, you may be better off in a personal pension or a stakeholder pension.”
Keith Churchouse, director at Chapters Financial also sees charges as one of the potential disadvantages of Sipps, for some investors: “The generic charges on a Sipp tend to be higher than on a personal or stakeholder pension, or in an autoenrolment scheme. If someone were investing a relatively small amount, the charges could be high.
“We would suggest SIPP investors may normally need to be focused on having a reasonable amount of funds to start with, and on taking a more aggressive stance to investment.”
Mr. Churchouse concludes: “Alternatively, accumulation in a pensions vehicle with lower charges, then reconsidering a SIPP at a later stage, could be a more suitable option.”
