Have a SIPP and dip your toes into self investment

ONE OF the major financial decisions in life is to establish a retirement plan which will ensure the standard of living that you aspire to. Far too many people do not realise they are effectively opting out of such decision-making by just placing the money with a traditional insurance company.

Instead, you can make decisions on where you would like your retirement money to be best placed, on the level of risk you are prepared to take on, and on transparency – which will enable you to transfer funds to a better area if circumstances change.

It is called a SIPP, standing for a self invested personal pension. It is easy to set up with the help of an experienced financial adviser. Unlike a personal pension arrangement, a SIPP provides "many with an opportunity to influence their long-term pension value by taking on the risks of and managing their own asset choices," says Alex MacLean, managing director of Edinburgh-based Aspire Wealth Management.

Of course, if the individual sees the merit in the SIPP wrapper and flexibility but lacks the knowledge or confidence to make investment decisions, their hand can be held by a good IFA. For those who want limited share dealing and most retirement money in funds, a life office SIPP can be the low-cost answer, with its reduced annual fees. For those who like significant self- investment, go for a specialist SIPP trustee such as Yorsipp, tips MacLean.

John Mortimer,of Muirfield Partnership in Edinburgh, likes SIPPs which allow investments in the majority of permitted areas including commercial property, but where you only pay for the services actually used. Standard Life's SIPP is just such an example with online access and valuations easily obtainable. As a Chartered Financial Planner, Mortimer is well placed to give advice on the best collectives and other investments to place into your SIPP.

"SIPPs are fantastic," says Scott Mackintosh, director of Edinburgh Investment Consultants, but adding, "for the right clients." He says there has been a move from ten years ago when everyone realised the flexibility and control SIPPs offered to "deferred SIPPs", which are reasonably low-cost personal pensions but with the ability to switch into becoming a SIPP if or when required.

With some providers offering more than 100 funds on their pension contracts, a SIPP should be for those who want to invest directly in shares, commercial property or buy beyond the range of funds offered.

Take expert advice about offers made on commercial property for a SIPP. Currently, there are offers to invest in football stadia, mobile-phone masts, public houses and hotel accommodation. As a warning, investors have seen the collapse of Guestinvest, a scheme that was eligible for SIPPs. It offered a "guaranteed" 6 per cent income from letting out luxury hotel rooms in London.

If attracted to place some commercial bricks and mortar into a SIPP, ask if you are obliged to take particular solicitors and property managers whose fees may be at the top end.

Few realise that non-earners, children and some already retired can take advantage of a SIPP. This is a great financial way to welcome a newborn baby, rather than most of the children's savings schemes that give derisory rates of interest.

If 2,880 is paid in, the SIPP manager can automatically claim 720 tax relief on your behalf, boosting the annual pension to 3,600. Anyone can make such contributions for someone else, so a godparent can do this for a child as you do not have to be family-related.

The benefits of planning forward are exciting.

A fund worth almost 1.5 million by the 68th birthday could be built up through annual payments of 2,880 for the first 18 years of the child's life, assuming no further contributions were made and 5.5 per cent net growth. While inflation will reduce its spending power, it would make a real start for a teenager. For an elderly person making such payments, there is another carrot: the likely reduction in inheritance tax liability.

For a stay-at-home spouse, this is a welcome opportunity to build up a pension fund independently from the main breadwinner of the family. Even someone who is retired but aged under 75 can still pay into a SIPP and qualify for the tax relief top-up. A SIPP can supplement your retirement income and you can decide when to take the tax-free cash, drawing the income at any time between the ages of 55-75. As personal allowances rise at 65 years, this tax year the first 9,490 of income is tax-free.

A SIPP can also be opened in addition to the pension plan provided by your employer. If you change employment, the SIPP can move with you and a new employer can contribute to it. Currently the government adds 20 per cent to your contributions and higher-rate taxpayers can claim back up to an extra 20 per cent if they have paid sufficient tax at the upper rate with a earned income ceiling of 130,000.

With an annual fiscal deficit of at least 178 billion, many express concern as to how long such tax relief generosity can continue, whichever Chancellor is in place. Higher-rate tax relief was cut twice last year and could altogether at the next Budget. The answer must be to take maximum advantage now. For the self-employed, regular monthly payments can be contributed to a SIPP or one-off payments made in line with your business profits.

"SIPPs are excellent for those not wishing to purchase an annuity with their entire pension," tips Grant Walker from Edinburgh Risk Management.

He adds: "The flexible retirement options make them very attractive to retiring clients."

Walker finds that many clients with large pension funds are not interested in purchasing an annuity at retirement and like the choice of unsecured income and drawing their pension commencement lump sum (as tax-free cash) on a regular basis. In this way, they can maximise their income and minimise their income tax.

Where someone wishes to invest in commercial property, discretionary fund management or private company shares, Walker tends to avoid an insurance provider SIPP "as they can be expensive and lack the flexibility of specialist SIPP providers such as Alltrust, AJ Bell or James Hay."

One of the benefits of using an experienced IFA is that they will be able to recommend the most appropriate SIPP for the client's circumstances.

If you are wary over SIPP stability, rest assured that investors' assets should be protected if a SIPP provider collapses, as the money is typically held in trust.

This means they are ring-fenced from the SIPP itself. In such a situation, the proceeds can be transferred to a new SIPP provider. If not in trust, insurance providers are covered under the Financial Services Compensation Scheme up to 100 per cent of the first 2,000 of each loss and 90 per cent of the balance with no limit. Money with non-insurers is fully protected up to 50,000 but compensation may be higher,. depending on the contract.

Instead of having a series of different-value pensions, a SIPP allows you to sweep them all up into one pot, saving time and paperwork. Once up and running, it is far easier to monitor performance and change investments when you like.