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Monday 7 July 2008

Do it yourself: the joy of SIPPs

Ian Cowie on the joys of Self-Invested Personal Pensions

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If you think pensions are boring, how exciting do you think poverty in old age will be? I only ask because conventional attitudes to this problematic topic are not just dangerous but also out of date. Most people know that failing to save will not prevent them growing old. Fewer realise how recent rule changes have removed many of the more rational excuses for shunning pensions.

First among these is distrust of insurance companies. The age of deference ended long ago and one unexpected casualty was the with-profits fund. People are no longer willing to buy financial products they do not understand simply because a man in a suit says it will be good for them.

If a clever salesman does succeed in clinching such a deal, consumers are more likely to seek compensation than sit back and hope for the best. Equitable Life had more actuaries than God but its attempt to mystify pension savers by redefining the meaning of the word ‘guarantee’ ended in disaster. The House of Lords insisted on a plain English interpretation of what ‘guaranteed annuity rate’ meant on all those policies promising savers an income for life which, as it turned out, Equitable simply could not afford to deliver.

More recently, pension savers have been allowed to see exactly where their money goes and the old compulsion to spend at least three quarters of your fund at retirement on an annuity has been substantially eased. The most advanced form of these schemes which put savers back in control are called Self-Invested Personal Pensions or SIPPs.

You can put shares, bonds, commercial property, unit or investment trusts, exchange-traded funds and guaranteed products into a SIPP. In fact, you can put almost any asset into this form of tax shelter — except residential property. The government foolishly raised hopes that even this would be allowed before dashing the dream just before SIPPs hit the mass market two years ago.

Heavens, you can even leave the money in risk-free deposits and still boost its value by a quarter for most people — and by two thirds for high earners — through the usual tax reliefs. Like any other pension, contributions to SIPPs are grossed up to the saver’s highest rate of income tax. So it currently costs basic-rate taxpayers £780 to add £1,000 to their fund before costs (and there are no initial costs on stakeholder schemes, for example), while top rate taxpayers can achieve the same effect by putting in £600.

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