What they are

Sipps are personal pension wrappers that offer individuals more freedom of choice than conventional personal pensions. They allow investors to choose their own investments or appoint an investment manager to look after the portfolio on their behalf.

How they work

Individuals have to appoint a trustee to oversee the operation of the Sipp, but having done that the individual can effectively run the pension fund on his or her own.

The beginner's guide to self-invested personal pensions (Sipps)

BACKGROUND

• How to choose a pension

• Annuities explained

• How to make a will

• How to pay for long-term care

A fully fledged Sipp can accommodate a wide range of investments under its umbrella, including shares, bonds, cash, commercial property, hedge funds and private equity. However you are likely to pay for the wider level of choice with higher charges.

The charges

They come in two kinds, the set-up fee and the annual administration fee. A low-cost Sipp , with a limited range of options, such as shares, funds and cash, might not charge a set-up fee and only a modest, if any, annual fee.

A full Sipp might charge a set-up fee of about £300 and then an annual fee of about £500. The charges are usually flat-rate, so they favour investors with larger pension pots. Some Sipp providers specify that investors must put in a minimum amount, say £50,000, though others, such as Alliance Trust Savings, have a minimum of just £50, while Killik & Co has no minimum.

There will, in addition to annual charges, be transaction charges on things such as dealing in shares and switching investments around.

Contributions

Under the new rules which came into force in April 2006, investors have much more freedom to invest money in a Sipp. They can make contributions up to 100 per cent of their earnings, with full tax relief on the total, subject to a maximum earnings limit of £245,000 in 2009-10. You can invest more but without tax relief. This replaces the less generous - and more complicated - earnings-related allowances that used to be available.

Contributions can be made by employers, employees and the self-employed. Where previously employees in a company pension scheme who earned more than £30,000 could not also contribute to a Sipp, they are free to do so now, provided that they do not exceed the limit of 100 per cent of their earnings, up to the maximum mentioned above.

Christine Ross, head of financial and trust planning at SG Hambros, says a contribution by an individual is made net of basic rate tax. So a basic rate tax payer wishing to invest £10,000 in a Sipp would actually pay just £8,000 in the current tax year. To invest £10,000, a higher rate taxpayer would currently pay an initial £8,000 to which would be automatically added the basic rate tax relief of £2,000 and the higher rate tax of £2,000 would be reclaimed directly from the Revenue. So the higher rate taxpayer would effectively pay £6,000.

Consolidation

People are free to bring together several different pensions under the one Sipp umbrella by transferring a series of separate schemes into a Sipp, though Mrs Ross says they should check whether there are any valuable benefits in the existing schemes that would be lost on transfer. The actual transfer costs have also to be taken into consideration. Some providers make no charge - others charge anything from £75 to £350.

Recent Rule Changes

One change that could, over time see a flood of money coming into Sipps is the alteration last October to the rules governing what are known as protected rights pension funds.

These funds represent the accumulated money that the Government paid to an estimated 10 million savers from 1988 onwards as an inducement to opt out of the State Earnings Related Pension Scheme (Serps). Prior to October, this money was locked away in a fairly narrow range of funds run by insurance companies, but from October savers have been free to invest these funds in Sipps, which offer a much greater range of investment choice.

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Five Websites

The Pensions Advisory Service

Advice Online

Moneyterms

Financial Services Authority

British Property Federation

Five Sipp Providers

Killik & Co

Hargreaves Lansdown

Alliance Trust

James Hay

Suffolk Life

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