What is a self directed pension?

As people become more knowledgeable about investments they want to have more control over their investment choices. That is why that is one of the reasons why self directed pensions have become so popular in the last few years. A lot of people get confused when trying to understand the difference between traditional insured pensions and self directed pensions. So we’re going to look at the key similarities and differences between the two types of pension plans.

Where they are the same

A self directed company pension is known as a small self-administered pension scheme. A self directed personal pension is known as just that or it can be a self directed PRSA.

The amount of money that you can invest invest into either type of plan is the exact same as if you are investing in an insured pension plan. The options you got a retirement also to exact same; you can’t get a better tax-free lump sum and the ARF and annuity options are the same.

Where they are different

The main difference between an insured pension plan and a self directed pension is the investment choice. Insured pensions invest in unit linked funds. That is, your money is grouped together with other people and the collective amount is invested as one. This gives you better buying power and you can diversify into areas that you could not buy your own. Your investment options are also limited to those offered by the insurance company. However insurance companies offer a wide range of investment funds so it is very unusual for you to not have a number of funds that are suitable to your investment strategy.

Self directed pensions give you much greater investment choice. You can choose the fund manager or stockbroker you want to use to make your investments for you, beit ETF’s, funds or purchase shares directly. You may also purchase property or other assets through yourself directed pension.

In practice,  your self directed pension will have its own bank account. All payments go into this bank account and then the money is transferred to the stockbroker or where ever you want to money invested.

When you trade your money is not pooled with anybody else’s, it is an individual trade. With fund platforms and ETF’s now readily available, it is easy enough to get diversification on your own as you can access thousands of different funds.

There are a number of rules around self directed pensions. The biggest rule rule is that transactions must be at arms length. That means you cannot buy property or shares from yourself and put them into your pension plan. If you have a property in your pension plan you cannot you can’t rent it out to your family or business. A pensioner trustee is appointed to keep an eye on things to ensure that your are not breaking any Revenue rules.

Small self administered pensions schemes also have to be submitted to the Revenue for approval. Depending on how busy they are in the Revenue, there can be delays in getting approval, so it is not suitable if your year end is fast approaching and you want to make a pension contribution.

Self directed pensions were traditionally more expensive to implement and therefore reserved to those with large pension funds. However in recent times the entry cost to self directed pensions has come down dramatically and they are a lot more accessible. As everything is done on an individual basis, they do not enjoy the same type of economies of scale that insured pensions get.

Have you any questions on self directed pensions? If so, contact me directly at steven@bluewaterfp.ie