- Suitable for you if you’re more experienced in investing and know how to make investment decisions.
- Choose your own investments – you can choose from a much larger range of investments than you can with a personal pension.
- You manage your investments yourself or hire an investment management to do it for you.
- Typically higher charges than standard personal pensions.
Self invested personal pensions (SIPPs) are DIY private pensions. They’re a bit like the difference between paying for someone to assemble your flatpack furniture for you and building it yourself. To make this option work well, it helps to have experience and knowledge of investments, and to be prepared to do some research. Some people opt for DIY because they want more control, and because they’re hoping to achieve higher gains by the time it comes to retiring.
What is a SIPP?
A SIPP, or self-invested personal pension, is a pension and investment product that you can use to save for retirement while growing your wealth through investments. It’s a type of private pension, but it lets you choose your own investments.
This type of product, along with other broadly similar products such as stocks and shares ISAs, is known as a wrapper because while it is not an investment in and of itself, it is a kind of imaginary membrane within which you can hold investments and give them special advantages – including tax benefits.
As mentioned above, a SIPP is also a pension product. This means that when you put money into your SIPP, you will benefit from the same tax advantages of any legitimate pension product – namely, you’ll effectively get back the tax you would have paid on that money.
How much can you save into a SIPP?
You can benefit from tax relief on up to £40,000 of contributions in the 2020/2021 tax year.
There is a lifetime allowance of £1,073,100 for the 2020/2021 tax year as well, which is the maximum that you can draw from the pension without triggering an extra tax charge.
What investments can I hold in my SIPP?
Most mainstream investment products such as open-ended funds, investment trusts, unit trusts and exchange traded funds, can be kept in a SIPP, as well as gilts (government bonds), corporate bonds and individual shares. It’s also possible to hold cash in a SIPP, although you won’t be paid interest on this at the same rate you would get with a savings product like a cash ISA.
Some people increase their cash holding in their SIPP as a way to reduce risk as they approach retirement – although again, they won’t get as much in interest as they would have with a savings product. However, this might not be a big problem, as the cash still would have been subject to the tax top-up when you paid it in. In other words, by this time, the money may have already done the work it was meant to do.
Note that unlike in an ISA, it is possible to hold commercial property in your SIPP, but not residential property.
How much do SIPPs cost?
You can buy SIPPs with most online investment platforms such as Hargreaves Lansdown, AJ Bell Youinvest and interactive investor. The platform will levy an annual charge, and you’ll also pay fees for whatever investments you choose, such as fund manager fees. The SIPP fee is usually below 1% of the value of your investments. Hargreaves charges 0.45% and AJ Bell charges 0.25%, each of which decreases with larger amounts of money. Alternatively, interactive investor charges a flat annual fee of £240, making it especially appealing for those with larger pots.
Why use a SIPP?
You might choose to use a SIPP rather than a generic private pension if you want to have more control over what you invest in and want to have more choice in what you can invest in. It’s also more likely to suit you if you think you’ll be investing larger sums of money.
As well as this, SIPPs carry more risk than private pensions, so if you’re not open to riskier investments and think that worrying about the value of your investments might keep you up at night, it may not be for you. If you think you’d like to be exposed to more risk with the opportunity to gain more on your investments then it could be suited to you.
The key differences between SIPPs and personal pensions:
- Suitable for those with less experience in investing.
- Choose a fund or selection of funds that broadly match the investment strategy you are looking for. Some personal pensions give you more freedom to choose, which blurs the lines a little.
- The specifics of your investments are managed by the fund’s investment experts.
- Different funds typically charge different amounts, but this tends to be less than for SIPPs.
What are the tax benefits?
As with all private pensions, you get a nice little top up from the government when you pay into a SIPP.
A basic rate taxpayer (that’s someone that pays 20% tax) only pays in £80 of every £100 that goes into your pension pot. Higher rate taxpayers pay in £60 for every £100 paid in. As well as this, you’ll get to withdraw the first 25% tax free when it comes to withdrawal (from the age of 55).
As with other tax wrappers such as ISAs, the money you put into a SIPP can grow without you having to pay capital gains tax or income tax.
Compared to other retirement products, investors may prefer to prioritise their workplace pensions because employers will match contributions up to a certain point, boosting the amount going in even further. However, if you are already contributing as much as you can to max out your employer contributions, or if you don’t have access to an employer pension (for example if you are self-employed), a SIPP might be suitable for you.
Because a SIPP is an investment product, the biggest risks come from the performance of the investments themselves. The value of your investments can very well diminish as well as increase.
Finally, because it’s a retirement product, you can’t access the money in your SIPP before age 55 without incurring a huge 25% tax penalty. If you will need your money sooner than this, consider foregoing a SIPP at least partially.
How do you withdraw a SIPP?
SIPP withdrawals are the same as for private pensions. You can choose to take out 25% of it tax-free. After this, you can choose to buy an annuity or a drawdown product, depending on what suits you most.
If you pass away before getting the chance to withdraw from your pension then it can be inherited by your beneficiaries – whether the money is taxed or not will depend on when you die.
If you die under the age of 75:
Those inheriting the pension will get it all tax free.
If you die over the age of 75:
They can have the whole lot, they can take it as a regular income or they can take lump sums whenever they like. In all of these cases, it’s subject to income tax.
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All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
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