SIPPs, Wraps, PPs - what does it all mean?
Buying a pension plan is a bit like buying a car in that you get what you pay for. There are essentially three types of pension plans available to individuals which qualify for favourable tax treatment. Legally, the 3 options would all be classified as personal pensions but variations have been refined over several years.
The entry level Stakeholder Pension allows you to make regular or single contributions which attract income tax relief. Your money is invested in one or more of the pension provider’s limited range of internally managed funds. The management charge for these funds is usually limited to 1% (1.5% for some variants) of the accumulating fund value. This is the Government preferred plan and it can be compared to the basic (L, if you remember the standard classifications of the 80s) version of the average family car. It gets you from A to B safely and reliably but there are not too many options included.
If you are prepared to pay a little more for your pension plan then if we stay with car analogy, you can have the deluxe personal pension or the GL version. This will include a much wider range of investment funds many of which will be managed externally by leading investment management companies. The charges for these funds will be higher than for those which apply to internally managed funds and will typically range from 1.25% to 2.00% per annum of the accumulating fund value. The medium to long term performance track record of these funds will generally be better, which is why they are being offered as options. However, a good track record over several years does not guarantee future performance. Furthermore, to select the right funds you would probably want to take professional advice.
If you are not concerned about cost and you want maximum performance and a long list of options then you need the most flexible of pension plans which if it were a car, might have been marketed as the GTX , or “build your own model” version. This is essentially an empty box or wrapper which is approved by the tax authorities as an approved pension plan and is usually offered as an on-line account, much like an on-line bank account. You can buy almost any type of mainstream investment you want including commercial property, equity shares, loan stocks and listed collective funds from any investment management company that is recognised by the UK regulators. Unsurprisingly, this variation is the most expensive.
The GTX version is usually described as a SIPP or Self Invested Personal Pension. SIPPs can be operated purely as pension plans with more or less electronic functionality but will frequently be part of a Wrap. Wrap is a phrase used to describe in generic terms the on-line administration system or account that allows you to buy and trade your investments. Wraps can also include ISAs and general investments, so a SIPP is just one element of a Wrap. You might not need any others but the options exist. In essence, a Wrap is a bigger empty box with separate sections that you can fill up with investments subject to varying tax treatments.
The degree of involvement you want to have in investing your money will determine which plan will best suit your needs. There is no point in having an expensive wrap if you don’t have very much money in your pension plans because the costs of looking after the funds will be relatively high. On the other hand if you have built up a substantial sum in several pension funds over your working life and you want to be able to manage your investments to maximise your returns, then a wrap with a properly constructed investment portfolio could transform your appreciation of the value of your pension assets.
Many people will find their needs can be met by an evolving strategy. You can start with the cheapest Stakeholder pension, build up a few thousand pounds, start to invest a little more widely with some advice using a more sophisticated policy and then move on to a Wrap later in life. The cost of moving between plans needs to be taken into account but it is reducing all the time.
These notes are a simplified summary and we recommend you take independent professional advice from a qualified pensions specialist.