Take a SIPP for chances of a better pension pot

Planning for retirement can range from investing in gold to buying a property in the sun but most opt for a pension. Yet a surprisingly high number of pension holders complain that they lack full control and transparency over how their pension pot is invested.

This almost certainly means they are not in a SIPP but in a personal or stakeholder pension managed by an insurance company.

SIPPs started life slowly as they were originally perceived as suitable only for the wealthier investor. A decade after their introduction, only around 40,000 had been established, according to Suffolk Life, SIPP specialists whose pensions business was started by a group of solicitors.

A triple combination of greater awareness of the attractive aspects of a SIPP, lower charges and the ending of so many final salary pension schemes, has boosted their popularity to over half a million.

SIPPs have three key benefits:

n Wider savings range. Most pensions restrict choice to a handful of investments, which are often mediocre, thereby limiting the potential for better returns.

n Easier to manage. Providers should be able to advise where a pension is invested and its value at the click of a mouse, by post or quick telephone call.

n Lower expenses leading to more money left to invest.

Many put off transferring their pension, thinking it is far too

complicated and time consuming. Yet specialist brokers offer straightforward application and transfer forms.

It's also an ideal way to consolidate old work pensions that may have been forgotten. It is far too easy to neglect paperwork relating to former pensions and lose track of your true retirement worth.

As a warning, "many old style pension plans are expensive and perform poorly", says Alex Davies, pensions director at brokers Hargreaves Lansdown.

A SIPP is not for everyone. If flexibility is not required, a stakeholder pension may be more appropriate. If you have access to the pension scheme of an employer, always consider that first.

If close to retirement, ask your pension providers if they levy high exit penalties for transferring out. Where they are substantial, check you will have sufficient time to make up the charges if the money is moved into a SIPP.

Conventional pensions do not allow savers to invest in individual shares (including investment trusts), hedge funds, exchange traded funds, gilts (Government stock), bonds, covered warrants or commercial property. Yet all these investments can go into a SIPP although not every wrapper provider offers the full range.

Tim Brear of Harrogate-based certified financial planners Brook-Dobson Brear, explains the difference: "A traditional pension is a supermarket carrier bag which can only be used to carry own branded goods. A SIPP is the carrier bag which can be loaded with all the things you want as opposed to being limited to a narrow choice of goods."

Seek a trusted stockbroker or other intermediary, particularly one with considerable SIPP experience, not only to provide the tax shelter but also for any advice. In December 2008, the Financial Services Authority reviewed the quality of advice on pension switching, looking at transfers from all types of pension plans into SIPPs and personal pensions. It found 16 per cent of the 500 cases reviewed received unsuitable advice.

SIPPs come in all shapes and sizes. Decide on how much flexibility or functionality you are likely to want before selecting a provider. Ask not only about the establishment cost (typically 230) and annual running charge (402 on average) but expenses for advice, dealing and transfers, both in and out.

Some providers allow for free switching between funds which could be useful when following a successful manager who has moved.

If you are likely to use a SIPP for income drawdown, check on any fees, both for setting up such an arrangement and for ongoing administration.

Consider also the exit costs. Some SIPP organisers let an annuity be purchased without incurring a fee whilst others can charge up to 290 plus VAT.

Whilst fees and expenses obviously cut the performance, they may well be worthwhile if receiving good investment advice. A personal client service with technical expertise as opposed to a budget plan (often with almost disguised trail commission) can be compared to buying clothing from a bespoke made-to-measure tailor or off a rack of mass-produced articles.

Both Leeds-based stockbrokers Charles Stanley and Redmayne-Bentley offer SIPPs. Jonathan Baker at Charles Stanley has two forms: a basic version with a restricted range of funds, which often appeals to younger clients who make regular contributions, and a massively versatile one.

The latter is often used by those aged 50 plus who wish to consolidate their pension arrangements prior to drawdown or owner occupiers, who buy property in the SIPP which is then leased to their business.

Money placed in a SIPP attracts up to 40 per cent tax relief and accumulated investments within a SIPP grow free of income tax. Another advantage is that the sale of investments – such as equities, bonds or property – is not subject to capital gains tax.

It's also possible to place 'protected rights' pensions – accumulated from contracting out of SERPS or the state second pension – in a SIPP.

There is the ability to withdraw up to 25 per cent of the fund as cash without incurring any tax charge. Benefits can be taken from age 55 (or 50 if you retire before April 6 this year).

Understandably, equities are the most popular selection for a SIPP but other popular choices are cash, corporate bonds and exchange traded funds, according to specialist AJ Bell. Traditional personal pensions restrict the investment range often to just 10-15 funds, often managed by an insurance company. Their relative performance is difficult to access.

Commercial property is an attractive asset to hold through a SIPP, particularly when taking a long-term view.

Take care with money parked in a deposit account within a SIPP. This option should not be taken for more than a few days as hardly any interest will be paid. A survey by Moneyfacts last October showed 15 SIPP accounts paid nothing for cash balances.

Finally, if in any doubt regarding a SIPP, use the Treasury bonus which is even available to non-taxpayers which might mean a spouse or child. Write a cheque for 2,880 and automatically the SIPP provider can boost your investment to 3,600, which makes a worthwhile 720 carrot.

The wonder of compound growth means that paying this sum annually into a child's pension for the first 18 years could give them a fund worth 1.5m at retirement, assuming 5.5 per cent net growth.

The freedom to choose

Paul Mason, 49, is a professional retailer. The former head of US and UK groups like Asda, Somerfield and Levi Strauss, Paul is now chairman of Radley's, the accessory firm.

He chose a self-invested personal pension or SIPP as part of his retirement planning eight years ago. Mr Mason said: "The SIPP gives me portability and control and is bespoke to my needs."

He is advised by Harrogate-based certified financial planners Brook-Dobson Brear, whose Tim Brear said: "It's all about control. With a SIPP, the pension saver and/or adviser have almost complete freedom, constrained only by legislation and affordability, to invest as they see fit within the pension wrapper."

Paul lives with his wife and three sons near Ilkley. He has a spread of investments and said: "China and Russia will ultimately do well." Currently he is not using the SIPP to invest in commercial property.

Away from finance and retailing, he enjoys watching his son play rugby and follows Sunderland Football Club.