Self Invested Personal Pensions - SIPPS
SIPPs What You Need to Know
- SIPPs (self-invested personal pensions) are DIY pension schemes that allow you to take greater control of your retirement savings.
- SIPPS allow you to choose what type of asset class you want your money to be put into and you can mix-and-match investments to minimise risk and maximise returns.
- Alternatively, you may want to appoint a fund manager or stockbroker to take control over your pension investments, though they will charge a fee for this service.
- As with other types of personal and occupational pensions, any investments made into a SIPP are tax-free.
- While most pension schemes only accept cash, you can put assets such as stocks and shares and commercial property into a SIPP.
- But you should be aware that SIPPs can involve more work and be riskier than standard pension schemes.
- A SIPP can be started either by yourself or by your employer, though either way, you will need to approach an HMRC-approved pension scheme provider.
What is a SIPP?
SIPPs are ‘self-invested personal pensions’. Quite simply, they’re ‘do-it-yourself’ pension schemes, allowing you to take control of your retirement savings by deciding where the money you put aside each month goes.
In particular, SIPPs allow you to choose how your pension pot is invested. Not only are you able to choose what type of asset class you want your money to be put into, but you can mix and match investments, thereby minimising risk and maximising returns, and, depending on the scheme you sign up with, you may also be able to move your investments around over the years.
Alternatively, you are also able to appoint a fund manager or find a stockbroker to take control over your pension investments. They will of course charge a fee for this service.
Benefits of SIPPs
As with other types of personal and occupational pensions, any investments made into a SIPP are tax-free. This effectively means that, whatever you put in, the Treasury will add to, according to your income tax rate, which could be up to 40 per cent.
One other major advantage is that, while most pension schemes only accept cash, you can put assets such as stocks and shares and commercial property into a SIPP, giving you more flexibility and potentially enabling you to boost your retirement fund even more.
Potential Drawbacks of SIPPs
Alongside the advantages of SIPPs, there are also a number of potential drawbacks. From the start, it should be noted that SIPPs are not for everyone, so assess your own finances and personal circumstances and ask yourself if this is the right savings option for you. If you are not sure, there are plenty of places you can turn to for advice such as The Citizens Advice Bureau.
For the most part, SIPPs are a product best-suited to savers who are able to put significant sums of money into their retirement fund. As such, if you are nearing retirement age or if your salary means that you will only be able to put a few pounds aside each month, then SIPPs are probably not the right pension product for you.
Additionally, you should be aware from the start that SIPPs can involve more work and be riskier than standard pension schemes. You are essentially investing your money, and investments can go down as well as up. As before, you have the power to take control of your investments, meaning you need to stay on top of your finances. Alternatively, you could pass this responsibility onto a professional expert, though you will have to pay for this.
Setting up a SIPP
A SIPP can be started either by yourself or by your employer. Either way, you will need to approach an HMRC-approved pension scheme provider, with most big insurers, IFAs and fund managers able to offer this service. Failure to do so will mean you are not able to benefit from the tax relief SIPPs offer.
A SIPP can either be started from scratch, or else you can transfer funds from another plan (or plans) into it. Note that, while there is no real minimum amount you will need to have saved up in order to start a SIPP, the larger the fund you are able to pay into it at the start, the greater the degree of flexibility you will be able to enjoy when it comes to managing your investments.
Additionally, the flat-rate fees charged by some scheme providers may mean that smaller contributions are not really viable.
HMRC approved SIPP Providers
There are a wide variety of SIPP providers in the market, and all offer different products at different costs. We would not look to recommend any particular providers because the right provider for you will depend on the amount of money you are looking to invest and the amount of flexibility you want to have.
We would strongly suggest that you look around the market carefully before choosing though, and perhaps take some advice from an independent pensions advisor.
Some SIPPs providers which offer a good range of competitively priced products include:
- AJ Bell Youinvest
- Alliance Trust Savings
- Barclays Stockbrokers
- Charles Stanley Direct
- Close Brothers A.M. Self-Directed Service
- Fidelity Personal Investing
- Halifax Share Dealing
- Hargreaves Lansdown
- Interactive Investor
- James Hay Modular iPlan
- Retireready from Aegon
- TD Direct Investing
- The Share Centre
- Trustnet Direct
Rules, Costs and Fees
The actual administration costs of a SIPP will vary from provider to provider, so it pays to shop around and find the appropriate saving vehicle for you. Similarly, different providers will have different rules on when you can access your savings, so again, take the time to find the right one for your circumstances.
However, there are some rules that are standard for all SIPPs. For starters, anyone taking out a SIPP needs to be both a UK resident and under the age of 75. Additionally, all savers have the right to move existing pension plans into their SIPP free of tax, so long as this does not take your annual contributions past the £255,000 threshold.
Government changes to Private Pensions:
In the 2014 Budget, the Government announced widespread changes to the pensions system, which have been backed by all parties so are here to stay. These have the potential to be very beneficial to those people holding SIPPs.
The key change is the relaxation of drawdown options, allowing pensions to access more of their pension pot on retirement. Before, you were allowed to remove up to 25% of your pension pot, but if you wanted to access any more you would have to pay 55% tax. You can now access as much as you like and will only have to pay the regular income tax rates.
Drawdown allows pensions even more control over where their pension money is invested, as well as allowing you to withdraw money completely and is therefore very attractive to those who invest in SIPPs because they like the extra control the product offers.
Government changes to Pensions Inheritance:
The changes to drawdown rules also offer more favourable death benefits for pensioners. Pensions can now be inherited by any nominated individual, and if the investor has died before the age of 75, then funds can be withdrawn tax free.
They can also continue to receive regular drawdowns tax free, or convert the drawdown fun into an annual annuity, again tax free.
If they are over 75, then all of these options remain available, but regular income tax applies. Because pensions are held in trust outside of your estate, inheritance tax will not be applied, although pension contributions made while in ill health or within two years of death may still be liable to it.
Though the ‘self-invested’ part of SIPPs may seem a little daunting, you needn’t be a money expert in order to benefit from this type of scheme. In fact, you can have as much or as little control over your investments as you wish, though note that there are some restrictions on what you can invest in without paying tax.
Permitted (tax-free) investments include:
- UK and overseas-listed stocks and shares.
- Unlisted shares.
- Insurance company funds.
- Commercial property.
- Open-ended investment companies (OEICs).
- Investment trusts.
- Deposit accounts and cash.
Meanwhile, the following investments are allowed by HMRC, though they are subject to tax penalties:
- Residential property.
- Non-investment grade gold bullion.
- ‘Pride in possession’ assets, such as antiques, paintings, vintage cars, etc.
If in any doubt about what you can and can’t invest in, consult with your scheme provider or administrator or with a professional personal finance advisor.
- For more information on SIPPs and other ways you can fund your retirement, check out the Pensions Advisory Service.
- The new changes to the Government rules on pensions are explained at their new PensionWise website.
- You can learn more about other private pensions options by reading our detailed guide on the subject.
- Once you’ve retired you many want to look at other savings options for your money. Read our guide to saving for your grandchildren to find out more.
- Many people are able to see them through self through later life using the value of their investments. Read our guide to buying shares online for more information.