Here’s a general overview of Self-Invested Personal Pensions (SIPP).
What is a Self-Invested Personal Pension (SIPP)?
A Self-invested personal pension (SIPP) is also known as a defined contribution personal pension. Regardless of whatever term you use, it is a pension fund dependant on your contributions and the contributions from your employers, if any. Furthermore, your SIPP’s value depends on how your investments have performed until the moment you retire. A SIPP is a pension fund that puts the user in the front seat because it is the user that decides how and where their money will be invested.
SIPP Basics
SIPPs provide a flexible yet very low cost and simple way to manage your pension contributions. When deciding how to invest your pension contributions, you can choose between several types of stocks, shares and funds. However, if you don’t feel comfortable making your investments, you should hire a regulated financial adviser that can assist you on any investment recommendations.
Your employer can also contribute to your SIPP and even if you lose your job, you can keep on contributing to your SIPP.
Self invested personal pensions (SIPPs) explained
Whether you plan to manage your pension investments alone or use the services of a financial adviser to do it on your behalf, everyone can set up their SIPP on their own. It is a fairly simple process that allows you to compare and choose from different providers’ offerings online.
After you open a SIPP account and make any contributions, you need to choose what to invest in. You can configure that setup once at the start, or you can make regular changes to your investment strategy.
Once your SIPP is operational, it won’t be any different than a regular pension.
- Each of your contributions will receive a government tax relief.
- It is acceptable to ask for your employer to contribute as well. However, your employer is not legally obligated to make additional contributions to your SIPP.
- The value of your SIPP fund will increase and decrease based on how your investments are performing.
SIPPs require a bit more of a proactive approach from your side as you need to monitor your investments regularly and make decisions based on their performance. Your pension provider or your selected financial adviser can also complete almost all of that work online.
Advantages of a SIPP
A SIPP is best suited for those that are open to combining their pension pots into a single fund and then proactively managing their money or letting a financial adviser do that on their behalf.
Other pension funds don’t give you any freedom to decide how you will invest your money as a SIPP fund does. At the same time, SIPPs brings a certain level of accountability, and every member needs to have at least a minimum understanding of money management and how an investment works.
Typically, it is not a problem if you deposit small monthly amounts into your SIPP but, larger monthly deposits will often give you access to a wider range of investment options.
Understanding SIPP fees and charges
Another critical aspect of managing your SIPP is learning about its charges. The thing with SIPP charges is they will come out of your pot no matter what. In the long run, they can end up costing you thousands of pounds and eating away big chunks from your final retirement fund.
Those with a considerably big pension pot often choose a “Full SIPP,” which comes with a wide range of investments. Its downside is that its setup fees, dealing charges, and annual management charges are considerably high.
Lite or low-cost SIPPs present a more affordable option featuring lower annual admin fees, as well as lower charges with selling and buying shares. Typically, there is a low setup fee or none at all associated with low-cost SIPPs.
The point is there are all sorts of SIPPs out there, and each is structured differently. Therefore, one needs to be careful when evaluating, comparing, and eventually choosing a SIPP. Then there are the exit charges that come on top of the SIPP’s setup, annual, and trading fees. Exit charges or exit penalties are common when trying to draw money from your SIPP. Different providers charge different exit penalties. Also, frequent investing can be somewhat more expensive with some providers because of their trading charges.
When in doubt about a financial product or a SIPP, and whether it suits your particular needs or not, get professional advice.
How to manage your SIPP
Even though SIPPs feature a wide selection of potential investments, there are certain limitations based on the following factors:
- Ongoing situation
- Your knowledge and understanding of the market
- The extent of your investment experience
- Your openness to risk
- Your goals
Everyone who feels uncomfortable with making investments or feels that there is too much responsibility on their shoulders should choose a financial adviser. By selecting an experienced financial adviser, you give the reigns of your SIPP to someone that can help you build an effective investment strategy and make all the investment decisions on your behalf.
What can I invest my SIPP in?
By adding all of your pension savings into a single SIPP, you open the door to a diverse selection of investment opportunities. Plus, you can track where your money is invested and how those investments are paying off. Some of the most significant appeals of SIPPs is that they can be invested in assets such as:
- Stocks and shares
- Open-ended investment companies (OEICs)
- Unit trusts
- Government bonds from various countries, including the UK bonds
- Investment trusts available through the stock exchange
- Commercial property
- Real estate investment trusts
- Gilts Exchange-traded funds and bonds that are being traded on London Stock Exchange and other markets across Europe
- Bank deposits
The list of investments you won’t be investing in includes:
- Loans
- Intellectual property
- Luxurious assets such as jewellery and art
- Residential property that is directly owned
- Buying property so that you can sell it later
- Commodities
Ready-made vs. DIY SIPP
These include a wide selection of investment opportunities that do not include investing in offshore funds, unlisted shares, or directly holding property.
Here is what you need to know about a DIY SIPP portfolio:
- Easy and fast set up
- Do not require a hands-on approach
Even though someone experienced will manage it, you need to be aware of a few things:
- Super easy and fast setup
- You don’t have to pick each investment by hand.
- The initial investment amount is somewhat higher.
- You don’t have to make sudden changes to your investment portfolio to react to market movements.
- You need to expect higher annual fees.
GSIPPs - Group self-invested personal pensions
A GSIPP is a group of SIPPs within one provider. In most cases, they are arranged by a single employer for their employees. A setup such as that allows both easier setup and administration than every employee setting up their own SIPP.
In addition to the default investment choice, employees will also be able to pick from other investment opportunities within the given provider.
That means employees will have an increased buying power for various assets such as commercial property. However, there isn’t any difference between GSIPP and standard SIPP.
Tax benefits
Both SIPPs and other personal pensions follow the same rules regarding how you contribute and access your pension.
Paying into your SIPP
Every time you deposit some amount into your SIPP, you will get tax relief from your government. The size of the tax relief depends on how big your tax band is. If you live in Scotland, be aware that tax rates are slightly different there. Otherwise, this is what you can count on:
- There is a 20% tax relief for basic-rate taxpayers.
- 40% tax relief for higher-rate taxpayers that one can claim via self-assessment.
- Additional-rate taxpayers get 45% tax relief (claimed through self-assessment).
For a basic-rate taxpayer, this means that for every contributed 80p, they get ₤1 in their SIPP.
It is also important to know that there is a cap to how much one can contribute to their SIPP. That is known as an Annual Allowance, and it allows you to deposit a maximum of ₤40,000 per year or all of your annual salary – the lower option. Those rules don’t apply for those that earn more than ₤240,000 or less than ₤3,600 per year.
Same as with standard pensions, there is no taxation on capital gains.
Withdrawing from your SIPP
From age 55 onward, you can withdraw 25% of your SIPP free of taxes. You can also withdraw the remaining 75%, but you will need to pay tax on that amount and it will be taxed based on your income tax band. According to the current tax laws, that amount will be added to your annual earnings and will be part of your income tax.
Need help with your SIPP?
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