Sipps: Take control of your pension

One of the nicest things about Isas is their flexibility. The other big tax-efficient wrapper – a pension – is far more restrictive. The up-front tax relief is attractive and the annual contribution limit higher than for an Isa. But there is a lifetime cap on how much you can accumulate in a pension plan.

Worse yet, once you’ve paid money in, you can’t access it until you’re 55 (under current rules). On top of that, governments tend to fiddle with them more than they do with Isas (the most recent batch of changes in the Budget was broadly positive, but it does demonstrate clearly that fairly radical rule changes come surprisingly regularly in the pensions market, despite its staid image).

However, if you’ve filled your Isa for the year and think the added relief is worth the restrictions and political risk, a self-invested personal pension (Sipp) – a personal pension where you make the investing decisions – may be worth considering.

What you can pay in

You can pay up to £50,000 a year gross of tax into a Sipp (falling to £40,000 from 2014/2015), subject to earning at least as much as you want to contribute in that tax year. Everybody can pay in £3,600 gross of tax (£2,880 net of 20% tax), no matter what they earn. You get tax relief on the contribution at your highest marginal tax rate.

For basic-rate taxpayers, you make your contribution out of your after-tax pay and HMRC pays the tax back into the Sipp. If you pay higher rates of tax, part of the tax relief is paid back into the Sipp and the rest reclaimed through your self-assessment tax return. Unlike Isas, unused allowances can be carried forward in some circumstances.

Finding a low-cost Sipp

When comparing Sipps, it’s useful to understand how they work. With an Isa, the broker and the administrator of the Isa are usually the same company. With Sipps, the administrator is often different from the broker. Broadly, the types of firms involved include:

• Brokers with their own Sipp admin arm, such as AJ Bell Youinvest, Alliance Trust Savings, Charles Stanley Direct and Hargreaves Lansdown.

• Brokers offering a Sipp where the administrator is another company, such as Barclays Stockbrokers, Halifax, Interactive Investor, The Share Centre, TD Direct Investing and most other major names.

• Brokers that don’t offer a Sipp directly, but can be used to trade a Sipp from a number of third-party administrators. These include iDealing, Interactive Brokers and Saxo Capital Markets. Third-party administrators include @sipp, EPML and Liberty.

The third option is the most flexible. Some Sipps with third-party administrators let you trade via multiple broker accounts and hold assets such as commercial property. But this comes at a price – typically £250 to £750 a year depending on the administrator, plus broker fees. So for the average investor, the first two options will be more cost-effective.

Sipp charges are generally higher than those for Isas, reflecting the higher amount of administration involved. The table below shows our estimates of which brokers offer good value for certain portfolio sizes, but your trading pattern and the balance of stocks, funds and other assets in your portfolio will make a significant difference to which represents the best deal for you.

We have taken no account of fees such as charges for buying an annuity or entering income drawdown, as these may well change significantly by the time most of today’s investors are ready to take benefits from their Sipps. Indeed, George Osborne’s recent planned changes to pension rules are just the latest twist in the saga and no doubt there will be many more in years to come.

 

Choosing the right Sipp provider for you

Size of portfolio Funds only Shares only Funds and shares
Under £50,000
Percentage-based fees and low trading charges usually work out cheapest
BestInvest
Fidelity
BestInvest
Clubfinance
iWeb
X-O
BestInvest
Clubfinance
iWeb
£50,000-100,000
Choice between fixed fee and percentage-based fees depends mostly on your trading pattern and holdings
The above plus:
Clubfinance
iWeb
The above, plus:
AJ Bell Youinvest
Charles Stanley Direct
Interactive Investor
The Share Centre
The above, plus:
AJ Bell Youinvest
Charles Stanley Direct
Interactive Investor
The Share Centre
Above £100,000
Uncapped percentage-based fees steadily less competitive versus fixed fees and capped fees
The above plus:
Alliance Trust Savings
AJ Bell Youinvest
Interactive Investor
The Share Centre
Mostly as above, but uncapped percentage fees on shares (eg BestInvest, Clubfinance) become expensive The above plus:
Alliance Trust Savings

 

See also:

• Isas make sense – so act quickly
• Cash Isas: Get a better rate on your savings
• Funds Isas: How to pick the best platform for you
• Stocks & shares Isas: It pays to compare brokers
• Now you can pop Aim shares into your Isa too
• Adventurous investing: Spice up your Isa with exotic investments

See our full Isa coverage here

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