A SIPP (or Self-Invested Personal Pension) is fast becoming a real alternative to traditional personal or stakeholder pensions. It offers a way for you to take control of your retirement destiny, the theory being that a wisely-invested SIPP can grow your pension pot more than a less flexible pension could.
However, as alluring as SIPPs are, they're certainly not for everyone.
SIPPs are not a new thing. They've actually been around for over 20 years, although until quite recently they have only really been suitable for those customers with larger pension pots who are comfortable making their own investment decisions.
Since the popularity of the internet has grown, Low Cost SIPPs have flourished as more of us turn our backs on some traditional pensions that haven't performed as well as we would have liked, and those of us with more modest pension pots look to take matters into our own hands and decide where our pensions are invested.
A SIPP is a type of personal pension that allows you more freedom and control over how your pension pot is invested. As opposed to a standard stakeholder or personal pension, a SIPP offers a greater number of funds, as well as the opportunity to invest directly in a number of different assets, including:
The types of asset you can hold in your SIPP are determined by what your SIPP provider allows, so you may not be able to invest in all of those named above.
Many providers now offer Low Cost SIPPs that can be managed online with lower fees and charges, increasing their appeal and accessibility to the general public. Low Cost SIPPs generally offer a more limited range of investment options than Full SIPPs, so it's important to check that you can make the investments you would want before proceeding.
As a SIPP is a type of personal pension, the rules on how you can contribute and take your pension are no different.
The tax relief you get on contributions made is the same – up to 100% of your annual salary, up to a maximum of £40,000 per tax year and will benefit from Government tax relief (If you're a non-taxpayer, you can invest up to £2,880 into a SIPP and benefit from tax relief at 20%).So every £100 a basic rate or non-taxpayer invests into a SIPP, as with a normal personal pension, will actually mean £125 in their pension pot!
Although a SIPP gives you more flexibility with regards to investment choice, you can't access your funds any earlier than a normal personal pension, which, under current rules, is on or after your 55th birthday. However, this minimum age will be increasing to 57 by 2028.
When you come to take your pension, the rules for a SIPP are the same as for a standard personal or stakeholder pension: up to 25% can be withdrawn as a tax-free lump sum, with the remainder to be used to provide an income in retirement. However, the new pension freedoms, which came into operation in April 2015, mean pensioners currently have the option to access their entire pension pot in a lump sum at any time after they reach the age of 55, and anything above the tax-free element will be taxed as earned income at the pensioner's marginal rate.
Until relatively recently, SIPPs have been the preserve of those with larger pension pots. The main reason for this was that the fees and charges involved were not economical unless your pension pot was of a certain size, effectively pricing a lot of people out of the SIPP market.
However, even with a Low Cost SIPP, there are still charges you should be aware of and compare:
Just setting up a SIPP can incur a cost. Set-up fees vary considerably – there may be no set-up fee (other charges may be higher though) or it could cost several hundred pounds.
You may be charged an annual fee by your broker to administer your SIPP. If you're invested in an open ended investment company (OEIC) or unit trust, there may be an annual fund management fee charged here also.
If you're buying or selling shares through your SIPP there may be charges for share dealing. Remember that with shares there will also be stamp duty to pay; however, because a SIPP is a tax-efficient wrapper, you don't pay any capital gains tax on anything you make on them.
It may be the case that you're disillusioned with your current pension, or that you'd prefer to take the reins and have more control of your pension pot. However, a SIPP is not risk-free and to someone not used to dealing in shares or other investments, it has the potential to prove a costly mistake.
A SIPP is only for you if you are a seasoned investor and you really understand what you're letting yourself in for. You've also got to be comfortable with the risks you are taking.
Having said that, if you are happy to invest for yourself, a SIPP can be a good way to bring different pensions you already have into one place in a way that can allow them to really grow.
The features and investment choice that a SIPP offers should be your primary consideration when deciding which SIPP is best for you. Although a Low Cost SIPP may offer a less expensive way of investing, remember that investment choice may be limited. On the flipside, there's no point paying for a load of features and investment choices that you're not going to use.
Keeping track of your SIPP is vital; therefore a provider with a good online management system is a must so you can regularly monitor the performance of your pension pot.
You should also take into consideration any preferential features of your existing pension, as well as any exit fees if you are considering transferring to a SIPP.
If you think a SIPP is right for you then consider using a provider with a good online management system – this will help you keep a close eye on the performance of your funds.
Investments are risk-based products. This means that the value of your initial investment and any income generated can fall as well as rise. As previously stated, a SIPP presents its own opportunities and risks so you should weigh this all up carefully, preferably with the assistance of an independent financial adviser.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.