SIPPS The Good, the Bad and the Ugly

When they were first introduced 18 years ago, Self-invested Personal Pensions (SIPPs for short) were, like Rolex watches, Porsches, school fees and private medical cover, the province of the very affluent. The barriers to SIPPs entry were high an average of £200,000 was the buy-in and most people who invested in them thought, rather like buying a big house in a gated community patrolled by security guards and attack dogs, they were investing in something that protected them from all the petty rules which governed the pensions of the Great Unwashed.

Up to a point, they were. Until 1988 the only providers of pension schemes were insurance companies and investments had to be channelled through their funds. This was perfectly acceptable if you could be satisfied that the investment was made in a style that suited your own circumstances (and, crucially, that you trusted the insurance company to do the right thing on your behalf, as concept that came hideously unstuck with Equitable Life).

By 1989, however, it had become possible to create a bespoke arrangement using your own investment skills, or an investment manager of your choice, designing a portfolio to suit your specific circumstances. The Self Invested Personal Pension (SIPP) was born.

Should you be taking advantage of a stakeholder pension? Find out more about your pension options.

And very popular they've become; according to James Hay, the UKs largest provider of SIPPs, there are now around 300,000 in existence. So what are SIPPS? How do they work, what can you invest in and are they expensive things to run? Moreover, are there any drawbacks to investing in SIPPs?

At its simplest level, a SIPP is a personal pension plan that still has tax advantages, especially a 40 per cent rebate into the SIPP for high rate taxpayers. The key difference is they give you much greater freedom over what type of investment you can hold inside your pension fund. Standard personal pensions typically limit your holdings to your life insurer's own funds investing in equities, bonds, cash and property, plus, in some cases, a selection of mutual funds from a selective list of external fund managers.

With a SIPP, the administration is separated from the investment management (with attendant charges, more of which later), and you are no longer limited to the dozen or so vehicles offered by your pension manager. Instead, you can choose from thousands of funds, stocks and shares, cash accounts and more complex financial insurance.

23 July 2008 © Moneyextra.com

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