Sipps: New pension status symbol?

Stock market falls have hit Sipp investors in recent weeks, leaving many to consider if self-investment is the best investment.

In recent years sales of sales of self-invested personal pensions (Sipps) have risen – in part as people wish to take more control of their pensions as funds underperform, partly due to the tax breaks, and partly as a Sipp ranks up as the next status symbol to brag about in the pub, along with widescreen TVs, sports cars and IT gadgets for the baby boomer generation.

This week Hargreaves Lansdown reported a 53 per cent increase in investments into Sipps.

Tom McPhail, head of pensions research at Hargreaves Lansdown, explained Sipps had grown in popularity of late due to the wide access to funds they offered.

"Sipps have become so popular because they do everything other pensions do and more at a similar cost.

"In terms of what you can do with a Sipp, you are being offered a choice of a thousand of more investment funds, equity trading funds, cash deposit options as opposed to a stakeholder pension with 20 funds or a personal pension with 100 funds.

"So you have much more choice and more control.

"If you have a share saver arrangement only a Sipp will do. If you want a particular fund that is not available in a personal pension, only a Sipp will do.

"If you invest into one income fund and the fund manager stops performing, a personal pension doesn't offer you a decent choice, but a Sipp would.

"Another advantage is if you are nervous with the market, you can stick the cash in a bank account and sit on the side lines until you want to jump back on the merry-go-round."

"You have all these options."

However, Douglas Jones, head of individual pensions marketing at life insurance and pension company Aegon, explained Sipps are not for everyone.

He explained the number of UK Sipps probably numbers around 150,000 with mostly high net worth and affluent customers, compared with around 10 million personal pensions.

Mr Jones warned although Sipps bring more control, they also bring more risk.

"When organising a Sipp, you have to always be careful to ask the right questions," he said.

He added Sipps had grown in popularity in part as a status simple with people bragging about their pensions at dinner parties, but added: "They are not right for everyone."

Graham Miller, director of O&M Systems which works with pension advisors providing investment information, said Sipps had become the latest fashion akin to the "latest handbag."

"I imagine there are down the pub talking about their Sipps and they go home and call their financial advisor and ask for a Sipp."

Mr McPhail explained Sipps had grown in popularity of late due to falling fees.

"The drawback with Sipps was until quite recently they were just too expensive. And they were the preserve of high-net worth investors. That is no longer the case," he said.

"You can get stakeholder pensions and personal pensions that are cheaper than a Sipp, but the cost differential has narrowed quite substantially."

Typically fees on a Sipp now stand between one per cent and two per cent.

"That is why when almost every sector of the pensions industry is contracting, the Sipp market is growing very very fast."

However, Mr Miller added financial advisors have to explain fees involved and some of the flexibility of Sipps are available in other pension products.

He stated pension products between stakeholder pensions and Sipps had flexibility and the possibility of lower fees.

Looking forward, Mr McPhail at Hargreaves Lansdown, said the two driving themes were investors looking to cash – taking advantage of tax breaks - or emerging markets, as investors are either being conservative or looking for greater risk.

"Sipp investing rewards people who are prepared to take an interest in the pension fund.

"If you are the kind of investor who is just going to throw some money at a pension on a monthly basis and doesn't care what happens to it thereafter, then perhaps a Sipp isn't for you."

"The more interest you put into your pension fund, the more benefit you get out of it."

Daniel Barnes