Since their launch in March 1989, SIPPs have become all the rage...
On 14 March 1989, Nigel Lawson, Chancellor of the Exchequer in the Thatcher government, brought his sixth Budget before the House of Commons. This turned out to be Lawson's final Budget, as he resigned and was replaced by John Major seven months later.
I remember that Tuesday afternoon well, as it was a milestone birthday for me. Most of that particular Budget passed me by, but I do remember Lawson launching a completely new kind of pension: the Self-Invested Personal Pension (SIPP).
SIPPs turn 21
This Sunday marks the 21st anniversary of the introduction of SIPPs by Lord Lawson. Alas, for nearly a decade, SIPPs really didn't catch on. Investors saw them as expensive and complicated, thanks to a limited range of investments combined with high management charges.
By 1999 -- ten years after their launch -- there were only 25,000 SIPPs in existence, as you can see from the table below:
However, over the past decade, SIPPs have boomed. Today, there are at least 500,000 SIPPs and this number is growing fast. Thanks to the bull market of the past year, there may be as much as £35 billion invested inside these tax shelters. Indeed, the SIPP market is one of the only pension areas to see significant growth, with over 80 providers competing for SIPP contributions.
Why did SIPPs 'ten-bag' by the end of the Noughties?
There are two main reasons: first, online management via the Internet allowed low-cost, high-volume SIPP providers to thrive from 2000 onwards. Second, pensions A-Day on 6 April 2006 simplified the rules governing pension contributions, while hugely increasing the ceiling for tax relief.
Thus, both wealthy and switched-on active investors have switched to SIPPs. However, the market is showing signs of competitive strains, so I expect more than a few SIPP providers to shut up shop in the years ahead.
Five reasons to love SIPPs
I have to confess that I'm a huge champion for SIPPs. I've had one for several years, as have my son and daughter (both of whom are at primary school). Indeed, if my wife wasn't in a very generous final-salary occupational scheme, then she'd have a SIPP, too!
Here's why I'm so keen on SIPPs:
SIPPs offer the widest choice of investment options, especially when compared to old-school personal pensions. This allows me to pick and choose a broad range of investments, using low-cost fund supermarkets and cheap share-dealing.
A low-cost online SIPP can incur smaller charges than even a discount stakeholder pension.
I use my SIPP as an umbrella to bring together a hotchpotch of previous pensions. This enables me to have all my pensions under one roof and keep a closer eye on them.
It's easy to transfer existing pensions and shareholdings directly into a SIPP, making it easy to fund and manage saving for retirement.
5. Income drawdown
Rather than being forced to buy an annuity, I can use the income-drawdown option to keep my pot fully invested while drawing an income from my SIPP (at least until age 75, that is).
Choosing a SIPP
The wealthiest investors -- those making large contributions -- may be willing to pay substantial fees for a bespoke SIPP service; one which may include commercial property, for example.
However, for most of us, the attraction of SIPPs is the freedom, control and discounts on offer. So, when weighing up which SIPP works for you, take note of any upfront fees, annual management charges, share-dealing costs, exit and transfer penalties, dealing discounts available, and so on.
On this basis, two SIPPs stand out for me:
- the Vantage SIPP from Hargreaves Lansdown, which provides an excellent service at low cost; and
- the Motley Fool SIPP, which offers real-time online dealing at just £10 per trade, with no set-up or inactivity charges, plus a low annual admin fee.
In short, anyone who is serious about saving for retirement should look into SIPPs, or risk missing a trick. Also, if you act now, you can dodge any pension cutbacks announced in the Budget of 24 March...
More from Cliff D'Arcy:
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