Pension planning: Risks warning as more pension savers look to Sipps Many turning to self-invested pensions could be in danger of some hefty losses, reports Jeff Salway More pension savers than ever are using self-invested personal pensions to take control of their retirement funding. But while the number of investors with Sipps has more than doubled over the past five years, some are being exposed to high-risk investments that could leave them seriously out of pocket, experts warn. Concerns are growing over the marketing and sale of Sipps, amid close regulatory scrutiny of the way in which they are used to promote high-risk investment products. Investors have been told to tread particularly carefully when advised to invest in unregulated investments within Sipps that could leave them at risk of hefty losses. Sipps provide greater freedom and flexibility when it comes to building up and investing retirement savings. They offer a do-it-yourself form of pension saving, allowing people to decide where their money goes and how to invest it. There are some 825,000 Sipps in force in the UK, at an average fund size of £107,000, according to trade magazine Money Management, with a total value of £88.5 billion. The main difference between a Sipp and a normal pension plan is that a far wider range of investments can be held in the former. The Sipps available range from those with a broad choice of asset types and funds to more basic, low-cost models. Through Sipps it's possible to invest in anything from cash accounts and gilts to commercial property and more esoteric and high-risk investments such as land, private equity, vineyards and forestry. For those with sizeable pension funds and who want investment flexibility, Sipps have their place. But they are only suitable for a small minority of investors and there has long been a sense of disquiet over their use by savers for whom ordinary pensions would suffice. There are especially misgivings over the presence in many Sipps of unregulated collective investment funds (UCIS). The Financial Services Authority (FSA), HM Revenue & Customs (HMRC) and The Pensions Regulator issued a rare joint warning last year over the potential for Sipp holders to be exposed to high-risk investments. They also cautioned that Sipps were used in the illegal practice of early pension release. The regulator slapped a £60,000 fine on a South Queensferry-based financial adviser earlier this year for selling clients into UCIS for which they were "clearly unsuitable." Patrick Francis O'Donnell, of P3 Wealth Management, was also banned by the Financial Services Authority (FSA) after advising 57 clients to put money into UCIS. They included a fork-lift driver and his wife who invested their whole pension fund in such schemes, which the FSA said should only be promoted to sophisticated and "high-net worth" individuals. Carl Melvin, certified and chartered financial planner at Affluent Financial Planning in Paisley, said: "There is the potential for widescale abuse in using SIPPs as a vehicle to persuade clients to invest in UCIS - high risk, big commissions to the "adviser" and no protection for the investor." He believes some unscrupulous advisers are selling Sipps to earn large commission from providers before the payments are outlawed under the retail distribution review (RDR), financial advice reforms coming into force next year. "This is the obvious last place to make a quick buck before RDR," said Melvin. One has to question whether people would be recommended UCIS via Sipps if the adviser was paid the same amount as he would in recommending conventional investments. I cannot think of a sound reason why a retail investor would ever want to invest in UCIS and lose the investor protection that applies with regulated investments. Cost is another factor that can diminish the value of Sipps for those with smaller funds to invest. The FSA has suggested that fund pots of less than £250,000 are unsuitable for high charging Sipps. Sipps aren't suitable for you if you do not need the wide choice available or you have a relatively small pension fund, as the fixed fee charges can be disproportionately large with small funds. As Melvin points out, while a fixed fee of £400 is small fry for someone with a £400,000 pension pot, it will seem excessive where the fund is just £4,000. Some four in ten providers charge annual fees of £400 or more, according to Defaqto. And while that has fallen sharply in recent times, the figure has been dragged down by the emergence of execution-only and online Sipps. At the top end of the market, annual fees range between £500 and £750. There are also initial charges - usually between £250 and £500, although many don't levy an upfront fee - and transaction charges, plus fees for property purchase, where relevant. Then there's the cash account issue. While Sipp users tend to hold around 10 per cent in cash, few providers offer anything but the most measly interest on that cash. Melvin generally advises people to go into Sipps only when commercial property comes into the equation. We only use Sipps for commercial property purchase for business owners and we never recommend UCIS. I would say commercial property purchase is the main reason we would recommend a Sipp. In fact, Sipps are unsuitable and unnecessary for all but a minority of affluent pension savers, according to Paul Lothian, director of Verus Financial Planning in Dundee. "The vast majority of personal pension investors, who will generally be perfectly well-served by the investments that a personal pension plan has to offer," he said. Yet many Sipps are held by people who don't need them, said Lothian, even though some can be better value than normal pension plans. "The concern is that some Sipp members are paying a premium for investment flexibility that they don't need and won't use," Lothian continued. More alarmingly, some pension investors are being recommended Sipp-qualifying investments that are wholly inappropriate to their attitude to risk and investment knowledge and experience. Anyone who is considering a Sipp, or who is advised to invest their pension in through one, should seek the guidance of a suitably qualified IFA or chartered financial planner. To find one near you visit www.findanadviser.org.