Are you thinking of using a SIPP? Perhaps you are already investing in a SIPP. Read on to discover the most common mistakes made by SIPP investors and how to avoid them.
1. Focusing too much on charges
In these difficult times we all want things to be as cheap as possible, why pay more than you have to?
But when it comes to a SIPP focusing solely on charges is wrong, it shouldn’t even be the first thing you look at; start filtering the vast number of SIPPs by looking at investment flexibility first and then consider charges.
For example, if deposit accounts play a large part in your investment strategy you don’t want a SIPP, however cheap, which does not allow access to a wide range of ‘sippable’ deposit accounts.
Dismiss SIPPs which don’t offer the investment flexibility you need and then focus on charges, only by approaching things in this order will you get the right result.
2. Using the wrong SIPP
We often see people who have bought a SIPP a number of years ago with the intention of taking advantage of the SIPP rules and investing in a wide range of assets, but for whatever reason these investments were never made.
The money which was going to be invested is often left in a range of funds or even worse the SIPP bank account.
Make sure you are not paying for functionality you are not using, for example do you really need that bespoke SIPP, with high annual charges, when you are just investing in a range of funds? Would you be better in a more restrictive, but still perfectly acceptable, lower charged SIPP?
3. Not shopping around for the best SIPP Cash rates
We all know we should shop around for the best savings interest rates, the same is true for Cash held in SIPPs. However, we don’t believe SIPP investors have caught on to this and are consequently losing large sums of money in potential interest each year, whilst benefiting the SIPP providers and adding to their profits.
Every SIPP comes with a ‘current account’ which is used to move money from one investment to another and works in a very similar way to our own personal current account.
We would never dream of leaving large sums of money in our own personal current accounts because the interest rate is so low, the same applies to SIPP ‘current accounts’, which pay on average less than 0.5% per year, and in some cases, nothing at all.
Why is the rate so low? Partly due to the current climate we live in and all time low interest rates, but also because many SIPP providers are paid a proportion of the interest, which would otherwise be credited to your SIPP ‘current account’. The interest paid on the SIPP ‘current account’ is effectively split between the SIPP and your SIPP provider.
Did you know that? No, we thought not. You can do something about it though.
Firstly, don’t leave more money than is absolutely necessary in the SIPP ‘current account’. Secondly, use our deposit accounts for SIPPs best buy table and shop around for better rates, even on instant access accounts you could easily get an extra 2% interest per year, the difference gets even wider when you look at fixed rate accounts.
4. Not researching the SIPP provider
Making sure you are with the right SIPP provider is key.
Once you have considered investment flexibility and charges take a look ‘under the bonnet’ of the SIPP provider. Are they profitable? Do they have strong cashflows? Are they still taking on new business?
You might not think that these things are important, but we’d urge you to consider them. When they are taking on new business the SIPP provider might look slick, but are their ongoing service standards as good? Are more SIPP investors leaving by the back door than are walking in the front door?
It’s important your SIPP provider has a sustainable business model, not because your assets are at risk if they fail, they are after all written in trust, but because a takeover can bring a period of instability, service standards can slip and charges increase.
You can’t predict the future, but do spend some time trying to assess the long term viability of your chosen SIPP provider, any change with them could affect you.
5. Believing that SIPPs are expensive
It’s true that some SIPPs are extremely expensive, but because most SIPPs work on a series of fixed prices they can be very cost effective, especially true for larger funds.
As with any product there are a range of providers charging different prices, the key is to make sure you don’t pay for functionality you won’t use, that you get value for money, and that your future plans won’t see fees rocket.
If you are moving from a Personal Pension into a SIPP sit down and compare the charges, you might be pleasantly surprised at how competitive the SIPP is.
6. Trying to bend the SIPP rules
Moreover, there are some investments which are just not allowable in SIPPs. For example we still regularly get asked whether residential property is allowed, or holiday homes, the answer is nearly always “no”; in a SIPP commercial property only is allowed.
Whilst we are on the subject, benefits cannot be taken before the age of 55, despite what the shady ‘pension busting’ companies will say.
These are just a couple of examples, there are plenty more. Bending the SIPP rules is a dangerous game, which can result in heavy tax penalties and a lower income in retirement.
7. Not reviewing charges
SIPP providers review their charging structures on a regular basis, you should do the same.
You might start off with the most competitive SIPP provider but not reviewing your choice means other, more competitive SIPPs, might pass you by.
Furthermore, your investment strategy may have changed, meaning that actually a different SIPP provider might charge you less.
Review your costs on a regular basis, compare them to other SIPP providers using our SIPP tables, but do make sure you consider the costs of leaving your SIPP provider; they can mount up and have to be factored into your calculations.
8. Not thinking ahead
It’s important that your SIPP provider can meet your future needs, we find too many people focus on the here and now, without considering the future.
For example if you think you might want to move into Flexible Drawdown in the near future it makes sense to select a SIPP provider who you know offers this option, rather than having to move SIPP provider in the future, which will incur exit fees and additional set up charges.
Think about what you might want to invest in and other factors which will be important to you over the next five years or so and make sure that the SIPP provider you choose can accommodate your needs both now and in the future.
9. Ignoring a SSAS
A SSAS (Small Self Administered Scheme) is often seen as a SIPP’s poor relation, the perception often being that a SSAS is more complex and expensive than a SIPP.
This is often untrue, particularly in relation to unlisted share purchase and loans made by the scheme, where a SSAS can often be more appropriate.
It is also true that a SSAS can often be cheaper than a Family SIPP arrangement which may be needed when there are multiple purchasers of a property.
If you are considering loan backs to your business, investing in unlisted or private company shares or there are a number of you buying a property then consider a SSAS, it might be a better alternative to a SIPP.
Investing in a SIPP, or indeed a SSAS, can be complex, and making the right decisions is not easy.
Whether you are thinking of investing in a new SIPP or reviewing an existing plan, SIPP Zone is here to help you choose the right SIPP.
If you are looking for advice our team of experienced Independent Financial Advisers are here to help you make the right decisions. To discuss your circumstances call them today on 0115 933 8433 or email firstname.lastname@example.org