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Do I Need A SIPP?

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So I didn't need a SIPP after all ?

I want Pension Freedoms so I need a SIPP – Wrong !!

Many customers wrongly believe that the only way they can flexibly access their pension fund is by using a SIPP.

When pension freedoms were introduced in April 2015 they presented a new opportunity for many customers. All limitations on how they used their pension, how much money they took, when they took it and so on were lifted – although the minimum age before you can access your pension remains at 55. Many people have used this opportunity to release their tax-free cash before retirement, to pay off a mortgage or other financial liability, while keeping the taxable income locked in the pension until they retire.

However there appears to have grown the urban myth that in order to access your pension flexibly, you need to use a product known as a SIPP, which stands for Self-Invested Personal Pension. To be clear, there is absolutely nothing wrong with a SIPP and we can set one up for you if you wish. The problem is that in our experience of looking at customers’ pensions, while SIPPs are suitable for some people, most people who use them get no better performance than a standard personal pension, but they can end up with a more expensive contract, take much higher risk and have significantly less regulatory protection.

The last point is very important given that over the last few years a number of SIPP providers have gone into administration.

Let’s try to make this clear! In order to flexibly access your pension fund, you will need a PERSONAL PENSION that has a drawdown facility (most do !!). In this context it is clear to see that a SIPP is just one type of personal pension (Self Invested PERSONAL PENSION) and not the only option.

So what is the difference ?

Personal Pension

Most people have traditionally used a standard personal pension. With this type of pension, you pick a fund (or more likely a portfolio of funds) in which your money is managed and hopefully grows. Each fund has its own manager who make the investment decisions in line with the objectives of the fund. If you are unhappy with any fund, you can switch out of that fund into another.  

If the personal pension provider were to go into administration, the Financial Services Compensation Scheme (FSCS) would protect 100% of your pension without limit.

The last such provider to hit financial difficulties was (to our memory) Equitable Life in 2000. While this wasn’t a good experience for the investors at the time, they did however still receive something back. Their pensions are still running and the company is still around. Not ideal, but it survived.

Self Invested Personal Pension 

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These were introduced to allow sophisticated investors access to investments that they would not have access to in a conventional personal pension. Some examples would be a commercial property, such as a warehouse, single company stock, some unregulated investments etc. Clearly most people don’t invest in these types of assets.

Companies who couldn’t afford to run a fully insured pension scheme could nevertheless start a SIPP business. Besides the types of assets discussed above, the SIPP providers also allowed access to the more standard fund types discussed in the personal pension section. This enabled them to market their SIPP to regular investors.

As stated above there is nothing wrong with a SIPP, but they are not suitable for everyone. This is perhaps borne out by the fact that the Financial Ombudsman receives far more complaints about SIPPs than any other pension product. It also appears that more SIPP complaints are upheld. In a three month period between 2019 & 2020, the Ombudsman received 653 complaints regarding SIPPs with almost half of them being upheld. This is compared to 296 complaints relating to Personal Pensions with only 22% of the complaints upheld.

The two biggest problems we find with SIPPs are :

They are more expensive than the customer realises

The charges are not explicit. SIPP providers tend to boast a cheap fixed management cost of either a quarterly or annual fee or percentage.  This is normally clear in the illustration or documentation you receive. However, the SIPP provider fees need to be added to the fees attached to the various investments you choose. This can significantly increase the underlying cost of the SIPP. To work out the true cost of the SIPP you will need to perform a weighted cost calculation. The SIPP provider doesn’t do it for you.

On top of this many SIPP providers will have an additional menu of costs to cover withdrawals, fund switches etc.

The Regulatory Protection is significantly lower

Earlier we explained that with a standard personal pension, if your pension provider goes into administration you would still receive 100% of your pension fund value via the FSCS. Should a SIPP provider go into administration your protection / compensation is limited at £85,000 (as at May 2020).

The other worrying issue linked to this is that it seems that, every 6 months or so, a SIPP does go into administration. In 2019 at least 2 big SIPP providers went to the wall and on 27 April 2020 Liberty SIPP also went into administration.

So this brings us back to the main question, do you really need a SIPP or will a standard Personal Pension do ?

We can hopefully examine the differences by looking at two typical customers, Theresa and Margaret.

They both want to take advantage of Pension Freedoms. Both Theresa and Margaret release tax free cash from their pensions to pay off their mortgage. After this they are both left with a fund of £500,000 to place into some form of Personal Pension. Theresa chooses a SIPP, while Margaret uses a standard Personal Pension.

Fund Choice :

They both use the following 4 funds, putting 25% of their fund in each :

  • ABC Bonds
  • ABC Gold
  • XYZ Managed
  • XYZ Global

Analysis : As they have exactly the same fund choices, then you would expect the annual performance of both pensions to keep track (costs accepted). Therefore if Theresa’s fund value increase by 7%, you would also expect to see a 7% rise in Margaret’s fund value.
However in this scenario, Theresa isn’t really using the special investment options available via the SIPP. Given that her fund selections are available in a standard personal pension, she has selected a product that has features she doesn’t need. Why is she using a SIPP?

Costs and Charges :

In this example, both the SIPP and the Personal Pension have an annual management charge (AMC) of 0.5%. The 4 funds they have selected each have an AMC of 1%. This means they both have a Weighted Annual Management Charge of 1.5%.

Analysis : As they both have a product that has the same base cost and have chosen the same funds, their costs and charges are the same. Theresa may have to pay some one-off costs if she wants to take money out or switch her funds. However, based on our experience, Theresa may be under the false impression that her charge is 0.5% and not the actual 1.5%. This is because SIPP providers tend to provide illustrations that show the cost of the product and ignore the fund cost, where the standard personal pension providers must quote all costs. SIPP costs are not always as clearly defined as the providers would have you beleive.

Discounts :

Both the SIPP and the standard Personal Pension may offer discounts for large fund values. With the SIPP provider this may relate to their charging structure only, leaving the fund manager costs at 1%, while insured personal pensions tend to offer discounts on everything. If this were the case then Margaret would be in a more advantageous position.

Pension Freedoms and Flexibility :

They both want to be able to draw-down funds whenever they want without limit.

Analysis : There is absolutely no difference between the products in this area. They will both have full freedom and control to use their pension fund in line with pension freedoms.

Both companies go into Administration :

After a few years their fund values have both risen to £600,000. Both Theresa and Margaret are shocked to hear that their pension provider has gone into administration and they will now be compensated by the FSCS. Margaret will receive the full £600,000 to place into an alternative pension. The FSCS pay Theresa compensation of £85,000. While she may get money back from ABC and XYZ fund managers this is not guaranteed and again may be limited.

Analysis : This is one of the most overlooked risks of a SIPP. Many customers do not believe that their company will go bust. The evidence is that insured personal pensions have tended not to come into such difficulties so regularly, but the instances of SIPPs getting into trouble are far more frequent.


All this analysis is trying to demonstrate is that for most typical people saving in a pension, they don’t need or want the special features contained in a SIPP. Equally they are taking more risk than they perhaps understand. To be clear we do arrange and advise on SIPPs and they are undoubtedly the right tool for the right person, but they are not suitable for everybody. The point we are making is that the average customer may be better off using a standard personal pension.

If you have any questions about SIPPs, Drawdown or any other pension matter please call us on 020 33 55 4827

Nothing in this article should be taken as personal advice and recommendation. UK tax rates and legislation are liable to change. Products, concepts, rates, legislation and rules referred to in the article above may not be current at the time you read the article.

Before you make any decision, it is imperative that you are fully aware of flexible drawdown pensions and the vaious ways it can be used. It is also impportant that you understand how your money is invested and any potential tax issues. At Best Pension Annuity, we have been assisting shoppers to make use of their pension funds in all manner of ways. We are exceptionally proud of the feedback our customers give us. If you have any question about flexible drawdown pensions or how we can help, please don’t hesitate to contact us. You can call us on 020 33 55 4827 Now !!
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Please Note : The new Pension Freedoms place a great deal of responsibility on the customer to make the right long term decision about their pension fund and how it is used. While Government Ministers say they "trust" people to make the right decisions, they will not have to deal with the financial consequences of a customer making the wrong decision. Your pension fund was intended to provide you with a long term income in retirement, if you take it all as one lump sum you may find yourself with little or no income during the later years of your life. This website does not give personal financial advice, you should think very carefully before making an irreversible decision. If you are in any doubt please request our independent financial advice service or speak to the Govenment's free guidance service Pension Wise.
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