The basics of a SIPP
A SIPP is a form of defined contribution personal pension that allows you to choose your own investments. If you don’t want to manage your own investments you can appoint a money manager to make investment decisions for you.
When you’re deciding where to invest your money you can usually pick from options including stocks and shares and several types of funds, policies and trusts.
A SIPP is flexible and portable: you can keep paying into it even if you change jobs or stop working. Your employer can also choose to contribute to your SIPP.
As with all defined contribution pensions , the amount that you will have available when you retire depends on the contributions that you (and any employers) have made and how your investments perform over time.
How self-invested personal pensions work
If you’re comfortable managing your own pension investments (or paying a money manager to do it for you) you can set up a SIPP yourself. It’s relatively easy to do, and you can compare different providers’ offerings online.
Once you’ve opened a SIPP, you’ll need to select what you want to invest in before making contributions - these can be made as a one-off or on a regular basis. If you plan to transfer one or more existing personal pensions into your SIPP, check whether you’ll need to pay any transfer fees to your existing provider first.
Once a SIPP is up and running, it acts much the same way as a regular pension:
- The government will provide tax relief to your contributions
- You can ask an employer to make additional contributions (they’re not obliged)
- Its value will rise and fall with the performance of its investments
Because SIPPs require a more hands-on approach than standard pensions, you’ll need to keep an eye on its performance and make ongoing investment decisions. This can usually be done online.
Why choose a SIPP?
With other types of pension, decisions about how to invest your money are in the hands of your pension provider.
This means that a SIPP comes with a certain level of responsibility, and requires savers to have some understanding of investing and to keep an eye on their investments.
You can usually opt to pay quite a low monthly amount into your SIPP, but a higher monthly contribution sometimes gives you access to more investment options.
SIPP fees and charges
If you’ve got a substantial pension pot then you can choose a ‘full SIPP’, which will offer a wide choice of investments but is also likely to charge a high set-up fee, an annual management fee and hefty trading fees.
The more accessible and affordable SIPPs are often called ‘low cost’ or ‘lite’ SIPPs. These tend to impose lower charges for buying and selling shares and lower annual admin fees. Many of them charge a minimal set-up fee or none at all.
There are many different SIPPs available and they have different fee structures, so it’s important to check and compare carefully. As well as fees for setting up your SIPP, annual fees and trading charges, also take a look at any exit penalties and the charge you’ll have to pay if you want to draw an income from your SIPP.
Seek professional advice if you’re not sure if a SIPP or any other type of financial product is right for you.
How to choose investments for your SIPP
Most SIPPs offer a limited but wide range of investments to choose from, and you’ll be able to select these using the portal offered by your provider.
The type of investments you choose might depend on:
- Your goals
- Current circumstances
- Risk tolerance
- Market knowledge
- Investment experience
If you’re not so confident picking suitable investments yourself (or simply prefer to trust someone with more experience), you could pass this responsibility on to a money manager to make these decisions for you.
Depending on the provider you choose, you may find that making frequent investments could prove costly. Again, a money manager can help you form an effective investment strategy.
What can you invest money in?
A key benefit of SIPPs is that they allow you to invest from a wide range of options. However, each SIPP provider offers their own range of investments to choose from, so you’ll want to check with them for a full list.
Investment types may include:
- Investment trusts
- Government securities/bonds
- Corporate bonds
- Unit trusts
- Open ended investment companies (OEICs)
- Exchange traded funds (ETFs)
- Real estate investment trusts (REITs)
- Commercial property
You typically won’t be able to invest in the following:
❌ Directly-owned residential property
❌ Buy-to-let property
❌ Luxury assets (eg. art and jewellery)
❌ Intellectual property
Do it yourself vs ready-made
Some providers offer SIPPs where the investments have already been chosen - hence, the term ‘ready-made’. They’ll typically allow you to choose from a small range of ready-made SIPPs to match your own investment goals. Once you’ve chosen a ready-made SIPP, your provider will continue to manage it for you.
There are clear benefits to a ready-made SIPP portfolio:
- It’s quick to set up
- There’s less hands-on involvement
- It will be managed by experts
But there are some downsides too:
❌ You won’t be able to choose individual investments
❌ You won’t be able to change your investments to react to markets
❌ There’s often a higher minimum investment amount
❌ You might have to pay higher annual charges
Group self-invested personal pensions (GSIPPs)
A GSIPP is a collection of SIPPs with the same provider, usually set up by an employer on behalf of its employees. This allows easier set up and administration compared to each individual employee arranging their own SIPP.
There will usually be a default investment choice, but employees do have the option of picking from other available investments with that provider.
There are some additional benefits, like enabling employees greater purchasing power for assets such as commercial property. But a GSIPP otherwise works the same way as a regular SIPP.
How and when can you access money in a SIPP?
A SIPP can be accessed from the age of 55, no matter who your provider is. But you can leave the money in for longer if you prefer.
The value of your SIPP will be the result of:
- The total amount of contributions paid into it
- The length of time those contributions had to grow
- The performance of its investments
- The amount of fees that were charged
When you decide to take money out of your SIPP, your options are very similar to traditional pensions. You could:
- Take all of it out as a lump sum
- Take out a smaller lump sum and leave the rest invested for later use
- Drawdown a smaller amount on a regular basis
- Buy an annuity
- Leave it for access at a later date when you need it
Bear in mind that 25% of the amount you take out is tax-free, but you’ll need to pay tax on the rest. This will contribute to your annual earnings and could lift you into a higher income tax bracket.
The tax benefits of a SIPP matches that of a traditional pension.
Paying into your SIPP
- Basic-rate taxpayers get 20% tax relief
- Higher-rate taxpayers get 40% tax relief (claimed through self-assessment)
- Additional-rate taxpayers get 45% tax relief (claimed through self-assessment)
So a basic-rate taxpayer only needs to contribute 80p of every £1 that ends up in their SIPP.
There’s a limit on the amount you can pay into your SIPP, called the Annual Allowance. This allows you to pay in up to £40,000 per year (or 100% of your salary - whichever is lower). The rules are slightly different for those earning less than £3,600 or more than £240,000.
Like regular pensions, there’s also no tax due on the growth in value of your investments.
Withdrawing from your SIPP
You can withdraw 25% of your SIPP tax-free. The other 75% will count towards your annual earnings and will be taxed depending on your income tax band.
For example, if your annual earnings (including the amount you withdraw from your SIPP) make you a higher-rate taxpayer, you’ll need to pay 40% tax on earnings above £50,001.
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Last edited: 08-09-2020