Send your pension pot soaring to new heights

If you have the cash, and the sophistication, Sipps are a flexible way to invest, writes Sam Dunn

Imagine saving for your retirement by investing in an office block, buying a mountain of Treasury bills and ploughing cash into a portfolio of racy tech shares.

Well, you already can: it's called a self-invested personal pension (Sipp). And in the wake of limp stock market performance and a gloomy outlook for the with-profits industry, it's a concept that has ballooned in popularity.

Figures published in June reveal that 96,206 Sipps had been sold by the end of last year, and annual sales were up 40 per cent on the previous year. A total of £20bn was invested in Sipps by the end of December 2002.

"They are very much in vogue at the moment because of poor stock market returns," says Sarah Killick, pensions specialist at the independent financial adviser (IFA) Cavendish Young. "With Sipps, you can invest in a broad range of investments."

This range includes shares, corporate bonds, gilts, unit trusts, investment trusts, traded endowment policies and commercial property. It's a pick'n'mix approach that offers growth opportunities but has one big drawback: high running costs.

"As a rule of thumb, you need £100,000 [for it to be cost effective], but you could do it with less," Ms Killick explains. "If you have a bigger pension pot, you may get a lower annual management charge, and the extra costs can be absorbed more easily.

"But it's important to remember that a Sipp is a personal pension and you have to buy an annuity by the time you are 75."

The opportunity to invest in commercial property and enjoy tax breaks has made Sipps particularly attractive to experienced investors. Some plans let you gain access to the funds held within them to raise 25 per cent of the cash needed to purchase a commercial property; the remaining 75 per cent can then be paid for with a mortgage. The property you have bought officially becomes part of your Sipp.

Meanwhile, if you buy, say, a £400,000 office building outright or take a stake in a larger development in the hope of rising commercial property prices and the prospect of a good stream of rental income, both capital gains and income are free of tax. Office tenants simply pay rent into the Sipp to pay off your mortgage.

Having a Sipp also allows you to be as cautious or as adventurous as you want with your investments. "You could invest all your Sipp in cash, and there would be no risk," says Ms Killick. "[But if you choose] the commercial property part, it becomes risky."

With so much to think about, a degree of sophistication is needed, as well as a large amount of money to transfer into a Sipp, either in cash or from existing pension schemes. The cost of running a Sipp demands a bigger-than-average pension pot, warns Gemma Watson, pensions specialist at IFA Chartwell Investment Management.

First, there are annual management costs. An IFA or life insurer will do this for around 0.75 per cent of the Sipp's total value. The alternative is to manage your Sipp yourself - if you know what you're doing.

Next, you have to pay fees to the company behind the Sipp. Each time a transaction takes place within it - if you switch unit trusts, for example - another fee is payable to the Sipp provider.

Ms Watson adds: "If you have, say, a [pension pot of] £20,000 and are just paying in £50 a month, I wouldn't advise a Sipp because full use would incur a lot of fees."

Like other personal pensions, a Sipp lets you take 25 per cent of the fund tax-free at any point after the age of 50. You can also draw down income; the amount available to you will depend on your age, the Sipp pot size and an investment "rate" set by the Government Actuary's Department (GAD).