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News Archive - February 2008

SIPP versus Stakeholder


There has been a backlash on the press about Self Invested Personal Pensions (SIPPs). This is ironic, as one or two years ago the papers were full of articles explaining why everyone should take out a SIPP as they were superior to stakeholder pensions.

So what is the truth of the matter? And what is the difference between a SIPP and a stakeholder pension?

Stakeholder pensions were introduced in 2001. They were designed to make pension saving more attractive to the man in the street, and to try to fill the huge pension savings gap. They obey the same rules as all other personal pensions in respect of how benefits are taken, contributions limits etc. However, to be described as a stakeholder pension, the policy must have no early transfer penalties and an annual charge capped at 1% of the fund value. (Since 2001 this rule has been amended, and a stakeholder pension can now charge up to 1.5% per annum for the first 10 years of the contract, falling to 1% afterwards).

Stakeholder pensions failed to bridge the savings gap, for the simple reason that the cap on charges meant that they were unprofitable products for insurance companies, so they were not widely marketed to the public. The low annual charge also excluded the better performing investment funds (whose annual charges are generally between 1.5% and 2% per annum) so stakeholder pensions generally have a very limited range of investment funds available.

Self Invested Personal Pensions (SIPPs) are at the other end of the pensions scale. Again, they follow the same rules regarding contribution limits and taking benefits, but they allow access to a wide range of investment options, including individual company shares, unit trusts and OEICS, gilts and commercial property. As a result they generally have higher charges covering their administration, dealing costs etc.

Historically they were seen as being more suitable for sophisticated investors with large investment funds. However, the advent of the online SIPP has reduced their charges and made them more accessible to the public. Unfortunately, many of these SIPPs have been taken out without advice by amateur investors tempted by slick marketing. They then find themselves choosing their own investments, which can easily lead to them taking much higher risks than they bargained for.

The middle ground between stakeholder and SIPP is a straightforward Personal Pension. These can give you a wider range of investment options than a stakeholder pension (because no cap on annual charges will apply) but they generally have a lower minimum contribution than a SIPP, so they cater for those who fall between the two extremes.

One thing to remember is that the cheapest option is not always the best. Pensions are very complex, and if you take out a policy without advice then you are on your own if anything goes wrong.

If you visit a pension specialist IFA (like me!) they will speak to you about your attitude to investment risk and your retirement goals. This will help them to select the best contract for you. They will also arrange to review your policy regularly to ensure that it is still doing its job.


Savings & Loans

I have had a few clients recently asking me what to do with a lump sum. A person who has a mortgage or other debts has the choice of reducing what they owe, or investing their lump sum in the hope of getting some growth on their capital. But which option is best?

There are no hard and fast rules here - it always comes down to individual circumstances.

If you have expensive debts like credit cards, it usually makes sense to pay them off as quickly as possible.

Other debts such as loans and mortgages might have early repayment penalties which should be taken into consideration if you are considering making an overpayment or full repayment.

The best mortgage deals are becoming scarcer for those with a high loan-to-value ratio - if your mortgage is more than 85% of the value of your property then you might be excluded from the most competitive interest rates.

If you have no debts, or you prefer the idea of investing your lump sum, the main factor to consider is your attitude to investment risk, which in turn is affected by the likelihood of you needing access to the lump sum at short notice in the future.

Many stockmarket-linked investment products involve an upfront charge or early encashment penalties, which means that they could be unsuitable as a short term investment. Safer investments like bank savings accounts or Cash ISAs give easy access to your capital, but the returns on offer are unlikely to outstrip inflation by more than a few percent each year.

If you speak to a good adviser, then they will take all of this into consideration before recommending the best course of action for you.


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The material here is for general information only and is not intended to be relied upon for individual investment decisions. Appropriate independent advice should be obtained before making any such decisions. Mulberry Financial Ltd does not accept any liability for any loss suffered by any user as a result of any such decision.
The information is based on our understanding of current HMRC rules and practices (as at the news article date) which are always subject to change. Taxation and trust advice and Cash ISAs are not regulated by the Financial Conduct Authority. This site is aimed at UK residents only.
Please remember that the prices of shares and other investments can fall sharply. You may not get back the money you originally invested. Past performance is not necessarily a guide to the future.

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