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Sipp building

I have over 100,000 in three personal pensions with different providers. I am interested in setting up a self-invested personal pension with a possible view to future property purchase. What are the advantages and disadvantages of transferring my existing funds to the Sipp?

Sipps will continue to become more popular due to the significant degree of investment control available. From April 2006, they will benefit from some important changes to the investment regulations including the ability to invest in residential property. But Sipps have much wider appeal than just being used to buy property.

The first point of comparison is to look at where your personal pensions are invested. Chances are you will be invested in with-profits funds or managed funds. Both types of funds will contain some cash, fixed-interest securities, property and shares – although some funds may exclude one or more of these asset classes – but you will have no control over the proportions held in each class.

One of the key factors for investment success is to build a suitable portfolio which fits your particular attitude towards risk, reward and volatility. While it is not impossible to do this modelling inside a conventional personal pension, it is easier to do it inside a Sipp.

Many personal pensions offer a wide range of investment funds, often with external investment houses as well as the pension provider. But only a Sipp can offer a choice of just about all the collective investment funds that are available.

In addition, a Sipp allows you to hold direct investments such as shares, bonds and commercial property. From April 2006, you will also be able to invest in residential property.

It can be reasonably said that a conventional pension offers some choice but a Sipp offers great choice and control. Control is different from choice in that it is about timing.

You can choose when to buy and sell the underlying investments in a Sipp but this is not possible inside a conventional personal pension – although it would be fun to phone up the managed fund manager and tell him to sell all his holdings in Marks & Spencer and see the reaction you get.

Before you carry out any transfers to a Sipp, you will need to quantify any exit penalties which might be imposed by your current plan providers. Hopefully, the current and transfer values of your three personal pensions will be the same, in which case it might be cost-free to transfer out, but watch out for any market value reductions applied to your with-profits funds. There may also be a period when your investments are out of the market and simply earning interest in a cash account. You may not want to be disadvantaged for too long.

Sipps are not without cost to establish but are by no means expensive. A myth has grown up that they are more expensive than conventional pensions but this is not the case. In any event, judge on value for money, not price alone. The greater choice and control might be worth paying for.

Residential property investment is an area which is attracting a great deal of interest. Many people who have effectively ignored pensions as a retirement planning vehicle in favour of residential buy to let are excited by the prospect of combining the tax reliefs of the former with the investment possibilities of the latter.

Such investments in a Sipp should not be entered into lightly. When you own a property directly, you exercise a lot of control over the property but inside a Sipp you may well need the permission of the trustees before you can make any changes to it. For those used to making their own decisions, this interference by the trustees may not be acceptable.

The trustees will also want to ensure any lease conditions are upheld and will typically employ a professional to check this and collect rents due. This service is not without cost. Some trustees may not allow certain types of property, for example, foreign holiday homes, so care will be needed in the selection of your Sipp if you do intend to use it for property purchase later on.

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