SIPPs Pensions Explained
What is a SIPP?
A SIPP (Self Invested Personal Pension) is a do-it-yourself personal pension. It allows you the freedom to choose the investments you want to put your savings into, thereby you are in control of your savings. These can also be known as a ‘wrapper’ as many investments can be held in one place. SIPPs can be easily managed online by creating accounts with the relevant websites. The website will give a snapshot of how much money is in your pension and where it has been invested.
SIPPs are suitable for people who want to consolidate their pensions into on pot before retirement or for people who want to keep their money invested after retirement, to draw down an income from it. SIPPs offer a great deal of pension freedoms and may be attractive to people who want to actively manage their pension fund before they retire.
How do SIPPs work?
Standard personal pension schemes are a pooled funds which your investment is a part of and is managed for you.
SIPPs are a form of personal pension that gives you the freedom to select the investments you wish to make and to manage them. If you do not want to make those decisions, you can pay an authorised investment manager who will make the decisions for you.
SIPPs were created for people who want to take control of their funds by dealing with and changing investments when they want to.
The SIPPs option is better suited to people who have investing experience and for those who have larger funds to invest. This means that SIPPs have higher charges than other forms of personal pensions or stakeholder pensions.
What can SIPPs invest in?
- Stocks and shares
- Investment trusts listed on any stock exchange
- UK government bonds, plus bonds issued by foreign governments
- Open ended investment companies which are recognised by the Financial Conduct Authority
- Gilts and bonds
- Exchange traded funds traded on the London Stock Exchange or other European markets
- Bank deposit accounts including non-Sterling accounts
- Commercial property
- Real estate investment trusts listed on any stock exchange
- Offshore funds
Who are SIPPs suitable for?
- People comfortable with their own investment decisions and who want a wider range of investments
- People with a larger pension 'pot' or who will be making significant pension contributions
- People with a financial adviser making decisions on their behalf
- People looking to consolidate all their pensions into one place
- People who want to keep their money invested after they retire so that they can draw down an income
Typical SIPP Fees and Charges
- Set up fees can be anything from £0 to £500
- Annual charges could be: a percentage 0.5% - 0.75%; or a flat fee of between £100 and £500
- Fund fees are usually around 1.5% a year but could be lower
- Exit fees will vary
SIPPs can potentially deliver higher growth, but the charges also must be considered. It isn’t easy to quantify how much will be paid in charges as it depends on the type of SIPP you have, the investments made and your level of trading.
For full SIPPs there is usually a flat fee, however some providers do make a percentage charge. Before taking the plunge, check carefully for both initial and annual charges as well as trading costs before you decide.
The amount you will be charged on your investment is a crucial consideration as it can have an enormous impact. For example, administration charges for a full SIPP can be £450 a year or more, this equates to 1% for a £50,000 pot.
In addition to this you will be paying fund fees of up to 1.5%, plus trading charges.
Tax relief on SIPPs
In line with all pension schemes, SIPPs qualify for uo to 45% tax relief on money put onto them. A similar tax-efficient wrapper (the only one) is a stocks and shares ISA. From April 2016 these have an annual contribution limit of £15,240 whereas the annual limit for tax relief on pension contributions is £40,000.
SIPPs can offer valuable tax relief on any commercial premises you own. Your premises can be ‘sold’ to the SIPP and free up funds to re-invest. This will also have inheritance tax benefits.
SIPP Suitability Considerations
Opening a SIPP is best suited to you if you have investment experience and are at ease with making your own decisions. There are risky investments that can be placed in a SIPP, so may not be suitable for you. However, it is always prudent to seek independent financial advice before going ahead with an investment.
If you do not have the relevant experience, a stakeholder or personal pension may be better suited for you. There may be a limited choice of investments, but you could choose a fund that has a range of assets in it, instead of picking your own.
SIPPs are better suited to people who have larger sums of savings. If you only have a small amount invested the charges could eat into your returns so can end up being very expensive in the long run.