In three recent posts we've looked at the key benefits of Self Invested Personal Pensions (SIPPs) and also our SIPP FAQ.
In this post we'll go on to address 6 common myths about SIPPs (if you like this post, you'll probably also like 13 ISA myths dispelled too).
6 SIPP myths that are false
1. You have to be a high net worth investor to invest in SIPPs – FALSE
SIPPs were first introduced in 1989, but high costs meant that for most of the next decade they were only suitable for those with large pension funds. In recent years, however, the rise of online trading platforms has made the SIPP a cost-effective option for many investors.
2. SIPPs carry high charges – FALSE
SIPPs come in very different shapes and sizes and ‘full’ SIPPs can have expensive charging structures. However, more and more low-cost SIPPs are making their way into the market as middle-income investors get increasingly fed up with the poor returns on more traditional pensions. It’s true that they were originally aimed at those with larger pension pots but, as charges have come down, it is now possible to run a SIPP even if you’re only putting £50 per month into your pension.
3. You have to manage your pension yourself – FALSE
Although they are called ‘self-invested’ pensions, this does not mean that you have to make your own investments decisions. We recommend that you do make your own investment decisions, however it is possible to pay a premium to have the SIPP managed by an authorised and regulated investment adviser or stockbroker.
4. SIPPs are only for those who want a spread of sophisticated investments – FALSE
While SIPP investors can own commercial property, individual shares and traded endowment policies, and often have a choice of more than 1,000 different investment funds, not all SIPPs are designed to hold such a wide spread of investments. For example, low-cost SIPPs are aimed mainly at those who are more comfortable with a spread of collective investment funds – unit trusts or open-ended investment companies (OEICs).
5. ‘SIPP approved’ or ‘HMRC approved’ means the investment inside the SIPP is safe – FALSE
Just because a provider allows a specific investment to be held in a SIPP, it doesn’t necessarily mean a significant amount of, or indeed any, due diligence has been done. The term ‘SIPP approved’ is used widely in connection with unregulated investments, including storage units, hotels in the UK and overseas, luxury holiday accommodation, bamboo crops, farmland in South America, renewable energy and car parks.
Unregulated investments are by their very nature higher risk than other options and the FCA (Financial Conduct Authority) are keeping a close eye on them and how they are marketed. Unregulated investments are only suitable for a minority of investors and if you do decide to invest in this way comprehensive due diligence is crucial.
Remember that using the term ‘SIPP approved’ or ‘HMRC approved’ in connection with an unregulated investment means absolutely nothing. There is no organisation which checks SIPP investments and provides them with a stamp of approval. The regulator certainly doesn’t approve them, after all these are unregulated investments. Personally, we wouldn’t touch unregulated investments with a barge pole.
6. You can’t carry forward unused annual allowances – FALSE
At the time of writing, it is possible to carry forward any unused annual allowances. Carry forward was a rule introduced in the 2011/12 tax year that allows you to use any leftover annual allowances from the last three tax years and apply them in the current tax year to top up your pension and receive tax relief on the additional contributions.
The allowance for each year is currently £50,000. That works out as a maximum of £150,000 for the previous three years and an additional £50,000 for the current year. However, you would need to have at least this level of income, since your maximum contribution is limited to 100% of your earnings.
As always, if you have any questions or thoughts on the points covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.
ISACO is a specialist in ISA and SIPP Investment and the pioneer of ‘Shadow Investment’, a simple way to grow your ISA and SIPP. Together with our clients, we have £57 million actively invested in ISAs and pensions*.
Our personal investment service allows you to look over our shoulder and buy into exactly the same funds as we are buying. These are investment funds that we personally own and so you can be assured that they are good quality. We are proud to say that by ‘shadowing’ us, our clients have made an annual return of 12.5% per year over the last four years** versus the FTSE 100’s 7.4%.
We currently have close to 400 carefully selected clients. Most of them have over £100,000 actively invested and the majority are DIY investors such as business owners, self-employed professionals and corporate executives. We also have clients from the financial services sector such as IFAs, wealth managers and fund managers. ISACO Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Our firm reference number is 525147.
* 15th November 2012: Internal estimation of total ISA and pension assets owned by ISACO Investment Team and ISACO premium clients.
** 31st December 2008 - 31st December 2012.
ISACO investment performance verified by Independent Executives Ltd.