A Sipp is essentially a do-it-yourself personal pension. You get the same tax breaks, but control the investment decisions. For example, many Sipps can invest in any of the 1,300 unit trusts on the market, while personal pensions and stakeholders are often restricted to the life insurer’s own funds.
Sipps may also give you the freedom to invest in individual shares, bonds, derivatives and commercial property. From April 2006, they will be able to hold residential property, too .
However, Sipps are not right for everyone. They can have high charges, which eat into funds of less than about £200,000.
Sipp providers usually levy a set-up fee, an annual charge and a transaction fee every time you buy an investment. You also pay charges for the underlying investment. The average Sipp has a set-up fee of £300, an annual charge of £500 and a transaction fee of £15 for shares, according to Defaqto, a data firm. This assumes a fund of £250,000.
The cheapest Sipps are not necessarily the best as they may not give you access to the full range of investments on the market.
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There are two different types of Sipp — hybrid and pure. Savers who want genuine investment freedom should beware hybrid schemes, as you normally have to make an initial investment into the provider’s own funds before making your own choice. With a pure Sipp, you should have more freedom.