If you find it unnecessarily restricting to be tied in to a pension company's choice of investments, you might find the flexibility and freedom of a Self-Invested Personal Pension (a SIPP, as it's usually known) attractive. The term is entirely self-explanatory in so far as you remain completely at the helm of every investment decision for your pension fund and still enjoy the income tax relief that is granted to all pension plans – that is to say, any money you are investing is invested before the deduction of tax, so that if you would otherwise have paid the basic rate of 20% tax, every £100 investment is effectively made for £80.



The pros…

Although you remain in complete control of the investment decisions, however, you do not need to make these entirely on your own. Your self-invested pension can be managed with the help of an independent financial adviser, who will be able to offer all the necessary investment advice and potentially steer you away from rash or unwise investments.

Although you will be paying for the financial adviser's management of the fund – by way of commissions that he will take from the investments made or in the form of a direct management fee – it is possible that the self-invested personal pension costs less than a more conventional plan from a pension company (who will be making a monthly and possibly annual charge for their management of the pension fund).

Although SIPPs were originally intended for investors with sufficient reserves to maintain a large pension fund and to pay the fees of an independent manager, the latter have come down quite enough for relatively modest pension funds to be maintained on a self-invested basis. The upper limit of contributions that can be made into a SIPP is one hundred percent of your salary up to a current (2008) £245,000 (rising by £10,000 each until the 2010/2011 tax year).

Subject to your earning more than £30,000 a year, you can also operate a self-invested pension alongside a regular occupational pension.

…and the cons

What makes the Self-invested Personal Pension attract to investors – they alone are responsible for all the investment decisions – is also what makes them potentially flawed. SIPPs are not for the faint-hearted or anyone who is not completely at home with doing the financial research and making wise investment decisions.

Although this degree of freedom will be relished by some, for others the sheer range of investment opportunities could prove overwhelming. These include anything from individual shares to unit trusts, gilts, traded endowment policies, cash or commercial property. However, the government's earlier plans to include "exotic" investments in such things as art, antiques, vintage cars and fine wines have since failed to see the light of day.

The cost of setting up and managing a SIPP is by no means as cheap as it might first appear. Set-up costs can be as high as £500 and there will be an annual management charge on top of that. Dealing charges will also be incurred whenever you buy and sell the investments included in the SIPP.

If you get things completely wrong, of course, and end up making poor investment decisions, then the whole of your pension savings are at risk.