Five-minute guide to SIPPs

The popularity of self-invested personal pensions (SIPPs) is growing, with more of us looking for a wider choice for our pension savings. But how does a SIPP work, and is it the right pension arrangement for you?

What is a SIPP?

They were introduced over 20 years ago for sophisticated investors who felt limited by the lack of choice offered by personal pensions.

A SIPP is a kind of DIY pension wrapper, allowing you to invest not just in a range of funds, but also in many other asset classes, including individual shares, bonds and gilts (government bonds), commodities, hedge funds and derivatives, and in some cases commercial property.

This freedom of choice comes with the burden (or benefit) of more responsibility, as you make your own decisions.

Who should get one?

The SIPP market now includes a variety of products with differing degrees of complexity and cost. The cheaper online versions allow you to invest as little as £100 a month.

At the other end of the market, comprehensive SIPPs offer exposure to assets traded in any recognised stock exchange worldwide, including some of the more esoteric investment areas.

The costs mean these are only worthwhile for wealthier people: for instance, the average AJ Bell comprehensive SIPP client has a pot value of £373,000 (although even the average held in its low-cost SIPP is £213,000).

Finally, hybrid SIPPs have grown in popularity recently: these are essentially self-invested pensions set up by insurance companies. Providers may require some investment in their own in-house funds, or offer reduced charges on in-house funds.

What are the rules?

The same tax rules apply to SIPPs as to other pensions. Everyone gets 20% tax relief and higher-rate taxpayers can claim another 20% (or 30% for additional rate taxpayers).

The maximum annual contribution is £50,000, but it's possible to roll over unused allowances up to £50,000 from the last three years, if you have the cash spare.

How much will it cost?

It's possible to set up an online SIPP without paying any setup or annual admin charges. Initial fund charges are also generally discounted. So the only fees you'll need to cover will be online or phone dealing fees if you want to hold individual shares or other traded assets.

For example, low-cost SIPP provider AJ Bell (a winner at our sister website Moneywise's Pension Awards) charges £9.95 per online deal.

Charges for full SIPPs are much heftier: set-up fees are typically around £300 to £400, with annual charges of up to £800 on top. In addition, there are extra costs for specialist investments like commercial property.

Should I transfer my existing pensions?

Consolidating your pension pots makes it easier to keep an eye on all your investments in a single SIPP wrapper, but watch out for penalties and exit fees - and never leave a pension scheme if it means you'll miss out on extra contributions from your employer.

Your SIPP provider will arrange the transfer but will need your contact details and contract reference numbers.

What can go in a SIPP?

Only commercial property (not residential) may be held in a SIPP, but that can include a wide range of options.

One of the most common is for business owners to hold their own offices within their pension. But there are many other SIPP-able possibilities, including petrol stations and hotel rooms.

Here are some other examples:

1: A plot in a graveyard

2: Carbon credits (tradeable certificates for a certain amount of carbon dioxide emission)

3: Sporting rights for grouse-shooting

4: A zoo (the land and buildings, but not the livestock)

5: A public toilet

6: Car-parking space