What Is A Self-Invested Personal Pension Scheme?
Saving for retirement is something that everyone needs to think about. Many people are happy simply to use the retirement schemes offered by their employers as they save towards their pension. But for others who want more control and flexibility (and have the experience to manage investments themselves) a self-investment personal pension (SIPP) can be an effective solution.
An SIPP works similarly to a traditional pension, except that you have a much broader range of investment options and that you manage either by yourself or with a financial adviser.
How are SIPPs different?
With a traditional pension, you pay into a pot that is run by a pension provider. The money in this pot is then invested by professionals with the aim to hopefully increase its value and provide you with enough money to retire.
With SIPPs, you have complete control over your investments. This means you can invest in a wider range of options including:
- Collective investments
- Investment funds
- Company shares
- Commercial property and land
Is consolidating many different pension schemes effective?
Over their working lives, many people accumulate several small pension schemes simply from having worked in many different businesses. SIPPs offer the opportunity to combine these multiple pensions together. However, doing so does come with some complications.
“If you have a few pension plans, including some older ones that you may not have checked for some time, it is a good idea to review the charges,” says Adam Reeves of Reeves Financial. “Higher charges can eat away at any investment returns. There is no guarantee you will be better off as a result of transferring, so you should take professional financial advice before you move a pension plan.”
What are the risks of a SIPP?
“Many pension schemes involve an element of risk, as the value of the underlying investments can go down as well as up,” says Claire Casalis at Money Saving Expert. “The typical trend is you get back more than you put in. Though this is not guaranteed – if stock markets hit a downturn just before you're about to retire or access your pension money, you can be left with a lot less than you were expecting.”
Of course, this statement is true of any invested pension scheme, not just SIPPs. But the risk might be heightened here because you are the one making the investment decisions. Unlike some pension schemes run by professionals who can spread out their investments, you will have to make specific calculated decisions.
Are you ready for retirement?
Consider if you were to retire today - do you feel confident that your pension schemes provide you with the financial support you need for the lifestyle you want? This is the question everyone must ask themselves as they think about retirement. Whether you choose a traditional pension, a SIPP or some combination of the two, it is better to think about this sooner rather than later.