Are you paying too much for your pension?

A hot topic in the world of retail financial services right now is the suitability of Self Invested Personal Pensions (SIPPs) when compared to the alternatives of a personal or stakeholder pension. Earlier this week the Financial Services Authority (FSA), who are responsible for investor protection in the UK, issued a warning to advisers that they should carefully examine SIPP charging structures to determine whether or not a personal pension or stakeholder pension might be a cheaper alternative.

A SIPP is basically a very flexible form of personal pension. It allows 'self investment' in a very wide range of assets including commercial property and company shares. Other than this additional investment flexibility, the rules governing a SIPP are broadly similar to a personal pension or stakeholder pension. However, a SIPP can be more expensive than a personal pension or stakeholder pension, particularly for smaller pension funds. This is because many of the charges are often expressed as a monetary amount rather than a percentage. This favours the larger size pension fund.

The danger of focusing solely on cost is that you miss out the importance of value. Selecting the cheapest financial product available does not necessarily give you access to the best value product. In the case of pensions this can mean paying less but ending up with a less functional product without access to a wide range of investment funds. Any investor with money languishing in an old-style pension contract that only offers a limited number of life assurance company managed pension funds will be able to tell you about the importance of having access to a wide range of funds.

One of the most attractive features of a SIPP is not the range of investment options but transparency. All costs and charges within a SIPP should be completely transparent. This gives the investor a real understanding of what they are paying for which enables them to measure value. Within many old-style personal pensions this simply isn't possible, making it difficult to determine what you are paying for fund management, pension plan administration, the sale of the product and ongoing advice.

I was quoted on this subject in The Observer today, in an article looking at the SIPP product from Standard Life and whether this offers good value for money for investors.

Martin Bamford, pensions expert with independent financial adviser Informed Choice, says Sipp charges have fallen steadily and many now cost less than stakeholder and personal pensions. 'Compare the 1 per cent cost of the Standard Life Sipp with the 1.5 per cent charged by some stakeholder pensions for the first 10 years,' he says. 'You just need to be careful about which pension plan you choose for your purposes.'

He splits Sipps into two camps: those that he recommends because they offer a much wider range of packaged funds than stakeholder or personal pensions, such as Winterthur Life's and Scottish Widows' plans, and more sophisticated ones that allow direct investment in shares and property, including schemes sold by Hornbuckle Mitchell, Pointon York and Suffolk Life.

'Standard Life falls into both camps,' he says.