Every week hundreds of investors are ditching personal pensions managed by life assurance companies and opting for the wider investment freedoms of self-invested personal pensions. Sipps have managed to achieve something the life insurance industry spectacularly failed to do. For many, they are making pensions interesting again.

But there are concerns that some investors are taking up these new freedoms without the skills or knowledge needed to manage these new pensions. The Financial Services Authority (FSA) has already warned that DIY pension investors who shun advice will be unprotected until new regulations are introduced next April. Its warning comes as the number of so-called execution-only pension investors surges, with one supplier alone opening 100 new plans a day.

The FSA has confirmed that it will go ahead with regulation of Sipps from April 2007. But while this will provide better consumer protection, there is growing evidence that some investors who have chosen to go it alone and manage their own pension portfolios through a Sipp are failing to understand the risks. Some have lost large sums, more than £500,000 in one case, as a result of poor investment choices.

Experts say common mistakes made by “advice-free” Sipp investors include too narrow a spread of investments, too many high- risk funds and equities and investing too heavily in “popular” sectors when valuations may be inflated.

There has been rapid growth in the number of providers offering execution-only Sipps and big online players such as Fidelity, Jupiter and Barclays Stockbrokers have sought to expand their execution-only business rapidly. The twin attractions of lower charges on execution-only plans, usually managed online, and controlling your own pension have tempted thousands to opt for a DIY Sipp.

There are believed to be a total of 150,000 Sipps investors in the UK with the number expected to grow to 500,000 by 2010. With charges as low as £300 to £500 a year on an execution-only plan compared with £3,000 to £5,000 a year on an advised Sipp plan (based on a fund size of £100,000) many investors have been tempted to cut out advice.

But some financial advisers fear that inexperienced investors are opting for execution-only Sipps without understanding the high risks involved. Sipps will not be fully regulated until April 6 next year and until then investors have no protection under the Financial Ombudsman Scheme and cannot call on the Financial Services Authority, the main financial watchdog, for help.

“Investors should beware that until April 2007 we do not regulate all aspects of Sipps so in the interim investors invest in execution-only plans at their own risk,” says an FSA pension spokesman. “Our message would be: be aware of the benefits but also the risks because you would not be able to make a claim for compensation.”

About 90 per cent of Sipps are managed by fund managers, stockbrokers or financial advisers but experts say nearly 10 per cent of the £30bn Sipp market is “execution-only”. Many execution-only clients have smaller funds compared with the average Sipp. They tend to have £20,000 to £100,000 in their funds as against the £250,000-plus in a typical Sipp.

Sipp providers AJ Bell of Manchester says that more than 30 per cent of its clients are execution-only. Leading investment specialist Hargreaves Lansdown has more than 18,000 Sipps clients, mainly execution-only, and is opening 100 new Sipps a day.

While many execution-only clients are confident investors – including some who are professional fund managers and stockbrokers – many “amateurs” lack the time and skills to run their own pension.

One adviser, who asked not to be identified, says: “I know of a client, a self-made businessman, who was adamant he wanted to put all his money into an execution-only Sipp. He put in just over £1m and 18 months later he had lost nearly half his fund. He had invested almost entirely in tech funds and tech stocks convinced he was going to make a killing.”

It is horror stories such as these which are spooking some Sipp providers. In April, Sipp specialist Suffolk Life, which has more than 7,000 Sipp clients, pulled out of the execution-only direct Sipp market over concerns about the direction of this sector of the market and the ability of private investors to understand all the risks.

John Moret, director of sales and marketing at Suffolk Life, says: “For us we felt the risks outweighed the benefits. The risks relate not to the Sipp wrapper itself but to the underlying investment choices and with no advice being given, the investor takes all the risk himself.”

For investors who want to play the markets, he suggests investors consider a “Sipp on the side” – allocating only a small fraction of their pension, say 5-10 per cent, to an execution-only plan, but leaving the rest with a professional manager.

Andy Bell, managing director of AJ Bell, which sells both execution-only and managed Sipps, says his website makes clear the risks involved in execution-only. He says these plans are best suited to active online share dealers who are familiar with trading and its risks.

“For most people it’s about control, not investment performance,” he says. “Execution-only clients do not need to be investment experts but they must be able to take some investment risk.”

At Hargreaves Lansdown, Mark Dampier, research director, is a strong supporter of Sipps but he says that any clients trying to transfer their money from a “gold-plated” final salary scheme to an execution-only Sipp would be told to take professional advice first.

“There is a danger to vulnerable investors but it’s worth remembering that some people who have got advice on pensions have really suffered when they have been given bad advice,” he says. “There is no guarantee of getting good advice.”

“Personally, I think that Sipps are the best thing since sliced bread – but people have got to get themselves educated before they go into them.”

Financial planner Harry Katz, principal of Norwest Consultants in London, says he stopped offering execution-only plans three years ago.

“I have major City clients, lawyers, accountants and judges who don’t manage their own portfolios,” he says. “They are too busy to do it.

“If someone has a large pension and a busy job you can’t do both.”