SIPP - self-invested personal pension - is the buzzword in low-cost DIY retirement planning. This section explains everything you need to know about SIPPs including how to start a SIPP.
WHAT IS A SIPP PENSION? There are several reasons why you might choose to unleash yourself from pension providers.
Investing in a SIPP means you get more control of planning for retirement. That is because SIPPs can be cheap 'do it yourself' personal pensions.
The top 3 reasons for choosing SIPP investments (self-invested personal pensions) are:
As a rule, a traditional personal pension (PPP) has some limits on investment choice. They generally get limited to a short list of 'pooled' funds run by fund managers at the pension company.
The way a SIPP works is different. You have a much broader choice in where to invest your money. Thus, they get called 'self-invested' because you get to choose your own investments.
Even so, that flexibility creates some responsibility on behalf of the investor [you]. A SIPP is best suited to someone who understands a level of investing. You may need to do some research and spend a significant amount of time doing so.
Making the wrong investment choice can be costly. If it happens, you would only have yourself to blame. Would you feel comfortable managing an investment portfolio? Does picking out your own investments suit your needs for a retirement plan?
Note: SIPP pensions are UK government-approved but they may not be suitable for every situation. There are other types of private pensions with less personal responsibilities.
A SIPP is a type of tax 'wrapper' that qualifies for tax rebates on the contributions. It works like a storage basket that holds many different types of investments.
The strict UK pension rules mean your payments also get some protection from the taxman.
The owner of a SIPP can manage their own fund completely online. There may be an alternative option to use telephone and postal services. But, this type of SIPP management may cost more to run.
Managing a self-invested personal pension in this way is much like online banking. It offers tremendous flexibility and convenience. Thus, the click of a button buys and sells investments and tracks how they are doing.
Note: There is another option. You could choose to pay an authorised investment manager who can make the decisions for you.
There are two common methods of starting a self-invested personal pension scheme. Most investors start it from scratch. By that, we mean using money not already held in a pension. But, SIPP rules also allow you to move the money from an existing pension fund to start one up.
What if you do not already have a personal pension? There are two ways to start investing in a SIPP. You can either open one up by making set monthly contributions or you can invest a lump sum.
What if you already own several different pension pots? You have the choice to consolidate them all together into one SIPP. That would mean they are all in one place and easy to monitor.
You can also transfer the funds from a single pension plan into a SIPP. This may be an ideal choice for those who are unhappy with the performance of one of your current pensions. Whatever you choose, there are a few extra things to consider:
There are two popular type of self-invested personal pensions:
HM Revenue and Customs permit all the asset investments in this list of SIPPs. As a rule, these assets qualify for tax advantages in the United Kingdom:
Saving money for your retirement has no limits per se. But there are limits to maximise the tax advantages of saving in a SIPP. For example:
Note: These figures represent your annual allowance for pension purposes. Even so, there is also a 'growth time allowance' set currently at £1.03 million. It refers to the total tax-free amount you can save in a personal pension in your lifetime.
The charges for SIPP portfolio and fund management differ across different providers. Beware, some can be very expensive. It depends on the quantity of investments held, their value, and how often you change them. These are indicative of typical charges for SIPP management:
Note: SIPPs under £50,000 get value from percentage-based fees with no fund dealing charges. SIPPs more than £50,000 tend to work out cheaper with fixed-fees and fund dealing charges.
The Financial Services Compensation Scheme provides protection in the United Kingdom. FSCS protect normal savings accounts up to the value of £85,000 (per person/institution). For example, this protection would apply if the banking institution goes broke.
Putting money into stocks and shares (or funds that invest in them) is a 'risk-based investment'. It is not the same as traditional savings, such as with a bank or building society. Thus, the FSCS protection that applies in this case would be different.
Note: FSCS protection for self-invested personal pensions is a complex subject. Always check with a regulated financial advisor or your SIPP provider.
Beginners Guide to Self-Invested Personal Pensions in the United Kingdom