One of the biggest decisions to make when you’re saving for retirement is which type of pension you should use.

The main choice is whether to opt for a traditional personal pension, offered by the likes of Aviva and Standard Life, or a self-invested personal pension (SIPP), provided by DIY investment platforms and bespoke SIPP providers.

Historically, a lot of traditional personal pensions have contained a selection of the provider’s own funds, but nowadays you can get personal pensions offering access to a wider range of investments.

This has blurred the line somewhat between personal pensions and SIPPs, which have traditionally offered more flexibility over which assets you can invest in.

The advantages of SIPPs

Although newer personal pensions offer more choice than older versions, SIPPs still provide the greatest range of investment options. They let you invest directly into listed shares – and in some cases unlisted shares.

The most flexible type of SIPP is a ‘full SIPP’, which allows for bespoke investments like commercial property. A full SIPP can borrow money to buy some investments – for example, raise a mortgage to part-fund the purchase of a property.

If you choose a SIPP through a DIY investment platform these bespoke investment options are unlikely to be available, so the difference in the investment choice that the SIPP and personal pension allow is less noticeable.

The crucial difference is that standard personal pensions do not allow for self-investment. You have to hand over money and control to the pension company who will manage the funds.

Mike Morrison, pensions expert at AJ Bell, says the advantage of a platform SIPP is that it provides access to all of the investments that can be automatically traded on the platform. You benefit from the flexibility and online access that the platform offers.

‘The wide range of investment options they provide enables people to build portfolios that are tailored to their specific needs and risk profile. These portfolios can usually be monitored easily online and changes to the portfolio can be made with a few clicks of a mouse,’ says Morrison.

Taking on responsibility

A DIY SIPP gives you the most control over what goes into your pension and how it is run. Whether you find this prospect exciting or intimidating will depend on your risk appetite and investment experience.

Tim Bennet, head of education at financial services group Killik, says anyone tempted to be a DIY investor via a SIPP should remember a key fact. They are taking on personal responsibility for the investment of vital funds that will affect the quality of their retirement.

‘This is not a decision to be taken lightly,’ he says.

If you want a SIPP without any investment responsibility you could use a financial adviser, but this will bring added cost.

Comparing the charges

SIPPs have traditionally been more expensive to run than standard personal pensions because of the extra flexibility they deliver.

Full SIPPs are still an expensive option because there is lots of administration involved in bespoke investments like commercial property.

The proliferation of cheaper DIY online SIPPs means the price gap between SIPPs and personal pensions has narrowed. Some platform SIPPs have annual charges of just 0.25%.

Bennet says if you have a relatively small amount to save and don’t value the extra flexibility offered by a SIPP the overall charges could outweigh the benefits.

This is because in addition to the platform fee you have to pay for the investments you put into your SIPP. There will be dealing charges for buying and selling investments, plus the underlying fees levied by fund managers, which can vary considerably.

Someone who uses their SIPP to create a portfolio of esoteric investments and trades frequently will pay far higher fees than someone who creates a portfolio of low-cost exchange-traded funds (ETFs) with minimal trading.

Morrison says many SIPPs have adopted a tiered approach which lets you start with a simple range of investments and then upgrade to a wider range if required, with charges increasing in line with the greater complexity of administration.

Who are SIPPs suitable for?

If you want to invest relatively small amounts of money on a low-cost basis without any financial responsibility, a traditional personal pension may suffice.

Bennet says a SIPP will usually be a better fit for someone who wants to take control over their money and enjoy greater freedom over where it is put to work.

SIPPs can be useful vehicles for consolidating lots of workplace pensions but check whether your existing schemes have high exit charges.

You can even ask your employer to pay pension contributions into your SIPP.

How to choose a SIPP

Don’t take the terms ‘full SIPP’ and ‘platform SIPP’ at face value when deciding which provider to use.

Neil MacGillivray, head of technical support at financial services group James Hay, says each SIPP provider will allow or disallow particular investments based on the business model they have adopted and the risks they’re prepared to take.

‘This means that the investments allowed in a full SIPP from one provider can differ greatly from those of another.

‘A similar argument could be applied to platform SIPPs, with some providers offering the choice of OEICs, ETFs, investment trusts and UK and overseas shares, and others only offering the choice of collectives from a restricted panel,’ says MacGillivray.

You can usually find out which investments a SIPP allows by looking at the provider’s website.

Another key thing to look at is charges, which differ from one provider to another.

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