Demystifying the confusion around SIPPs

Paul Beadle, Mouthy Money

The chances are you’ve heard of SIPPs – Self Invested Personal Pensions – and maybe you have a good idea how they work. However, lots of people have either never heard of a SIPP or have been put off opening one because they feel they are too complicated or too time consuming to manage.

In EQi’s recent pensions research, undertaken by the Cebr (Centre for Economic and Business Research), 14% of people said they were not aware of SIPPs, which is equal to about 7.3 million people in the UK. A further 12% of those surveyed – equal to around 6.1. million people – said that, while they were aware of SIPPs, they didn’t know what the rules are around moving their other pensions, whereas 7% - or 3.6 million people – didn’t know they could actually move or consolidate their existing pension pots.

In this article we will look at some of the questions people have about SIPPs to help break down the barriers that seem to exist, because for many people having a SIPP, especially if you have a string of existing pensions, could be a great way of getting control of your retirement planning.

SIPPs were created by the government over 30 years ago to help consumers take more control of their pensions. Back then the number of people who had a private pension was much lower, so unless you were lucky enough to have a company pension, most people relied on their state pension being able to support them in their retirement.

However, due to an aging population and people living longer, as well as various changes to state pension provision over the years, it is unlikely that the state pension will provide a sufficient income on its own for most people when they retire.

To address this problem the government also introduced workplace pensions, into which staff would be automatically enrolled by their employers. Workplace pensions have been phenomenally successful, with EQi’s research finding that between 2013 and 2019 the share of employees enrolled in workplace pensions rose from less than half (49.8%) to more than three quarters (77.4%).

But the success of the workplace pension doesn’t always result in people having a better understanding of whether it will be sufficient to support them in their retirement years. EQi’s research found that 18 million people have never reviewed their pensions or retirement plans, while 12 million people do not know how much money they have in their pension.

Part of the problem is that every time somebody starts a new job, they get a new workplace pension. Over the course of the average career this can result in a lot of pension pots to try and keep track of. Other workers might have taken the jump to becoming self-employed, in which case the provision of a pension will be on their shoulders rather than an employer. As a result, their retirement plans could have fallen by the wayside.

This is where a SIPP comes in.

One of the benefits of SIPPs is that they provide the opportunity for people to consolidate their pensions into a single account, allowing for greater transparency both on the amount that is saved and the amount of money they are being charged in fees. It also gives them a greater understanding of how their pension investments are performing and more control over how their money is invested.

But EQi’s research revealed a number of barriers that are holding people back from exploring a SIPP for their retirement planning. Here are the biggest ones and what you can do to overcome them.

11%, or 5.4 million people, felt that setting up a SIPP would be too complicated or that they might make a mistake transferring their pensions; while 7%, or 3.6 million people, felt that setting up a SIPP would take up too much time and effort.

Opening a SIPP is pretty straightforward as your SIPP provider will handle all the administration for you and in particular the transfer of all your old pension pots into your new SIPP. You’ll need to fill out some paperwork, answer a few questions and of course provide the details of your existing pensions. If you don’t have all your pension paperwork to hand, contact your pension provider to get the information you need. If you’ve lost track of some of your pensions, which is easy to do if you’ve had a number of different jobs over the years, you can track them down using the government’s pension tracing service.

You should also check that your old pensions are suitable for transferring to a SIPP and that you will benefit from doing so. For example, a lot of older company pensions are so-called defined benefit or final salary schemes where your pension income is based on your final salary. You are better off not consolidating these types of pension into a SIPP.

Other private pensions might offer other benefits such as bonuses or may have expensive exit fees, so check for these before deciding whether to transfer them or not. Again, your SIPP provider can guide you, but you might also want to seek the advice of a financial advisor.

12%, or 6 million people, said they were worried that by trying to open a SIPP they might end up losing their pension or be subject to fraud or mis-selling.

This is an understandable concern, particularly if you aren’t familiar with pensions or more complex financial investment-based products. If you have a financial adviser, you could ask them for advice, but they are likely to charge you a fee, possibly on an ongoing basis, in addition to any fees associated with the SIPP.

As SIPPs are designed for people to be able manage their retirement savings themselves, it makes sense to try and do it yourself. There are a number of SIPP providers or online investment platforms that offer SIPPs, and you can take a look at reputable personal finance websites like Money To The Masses or Money Mentor from the Times newspaper to find an independent view of the different SIPP providers available.

13%, or 6.9 million people, said they were not confident selecting the investments for their SIPP that they would like to place their pension savings into.

One of the great things about a SIPP is that you get complete control over how you invest your money, and much more choice than compared with a traditional pension. So, you can invest in shares, ETFs (exchange traded funds), funds or other investments vehicles such as trusts – or indeed a mixture of any or all of those.

Most SIPP providers, or investment platforms if you decide to open your SIPP through one of those, will have lots of information about the different options available and how they suit your investment knowledge, your life stage and also your risk appetite. For example, EQi has a guide for first time investors which will help you decide what kind of investment best suits you and your SIPP. EQi also has a range of ready-made starter funds if you’re new to investing, which are based on your risk level.

9%, or 4.8 million people, felt the process of managing a SIPP on an ongoing basis would take up too much time and effort.

A pension, just like any investment, should be seen as a longer-term plan, so you don’t need to manage it on a frequent basis as you would with your savings or bank account. However, reviewing your SIPP at least once a year is a good idea so you can see how it is performing and make any changes if need be.

Depending on how old you are and what stage of your life you’re in, if you’re just starting a family for example or getting closer to retirement, this could affect the way you think about your pension, how much you put into it and what you invest in. For example, if you are in your 20s or 30s it makes sense to invest in something that offers the greater potential for growth. But as you get closer to retirement you may want to invest in something that offers lower growth potential but is less likely to be affected by the ups and the downs of the stock market. EQi’s article on investing for your retirement might be a useful guide.

Managing a SIPP on an ongoing basis doesn’t need to be too onerous, but because you have much more control, and most of your savings will be in one place, it might encourage you to get more involved in your retirement planning. For example, EQi’s research found that almost a quarter (24%) of self-employed people knew how much was in their pension compared with just 14% of employees, because people working for themselves are obviously more engaged in their retirement plans. A SIPP will be a more straightforward means of tracking your pension pot.

A pension is probably the most important financial product most of us will ever have, and for many people it will be the most valuable, often worth even more than our homes. Therefore, it really makes sense to take more interest in your pension, how it’s performing and whether it will provide you with the retirement you hope for.

A SIPP could be just the thing you need to take control of your retirement plans and, contrary to what many people believe, it’s actually simpler to open and manage than you may think.

EQi’s research was carried out by the Centre for Economic and Business Research (Cebr), including a survey of more than 2,000 adults by YouGov.