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Self-Invested Personal Pension Explained

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:

  • It allows you some choice in where to make the investments.
  • You get to manage your own pension pot.
  • You can control and track where your money gets invested.

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.

SIPP Pensions Explained: How SIPPs Work

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.

Managing Self-Invested Personal Pensions

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.

How to Start a SIPP

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.

Setting Up New Contributions

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.

Transferring Funds from other Pensions

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:

  1. Check whether there will be penalties for leaving an existing pension.
  2. Do some research to confirm that switching to a SIPP will be beneficial.
  3. Most workers will get a personal pension from 2018 according to the auto enrolment rules. Exceptions apply to those who opt out or are self-employed).

Different Types of SIPPs Explained

There are two popular type of self-invested personal pensions:

  • Low Cost SIPPs: Usually kept low-cost because you get to control the decision-making (i.e. execution only).
  • Full SIPP: Comes with professional advice and hence higher charges. But, it tends to offer the widest choice of investments.

Range of Assets for SIPP Investments

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:

  • Commercial property (e.g. factory premises, offices, or shops)
  • Deposit accounts with banks and building societies
  • Government securities
  • Individual stocks and shares quoted on a recognised UK or overseas stock exchange.
  • Insurance company funds
  • Investment trusts
  • Some National Savings and Investment products
  • Traded endowment policies
  • Unit trusts

SIPP Pension Rules: SIPP Limits

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:

  • Earners: Can contribute 100% of their annual earnings before tax up to the limit of £40,000 [2022/23 tax year]. SIPP rules change for those who earn over £200,000. The amount reduces at a rate of £1 for every £2 earned over £200,000. The final the tax-free limit is £10,000.
  • Non-earners: Can contribute up to £3,600 per tax year and get basic-rate tax relief. In effect, non-workers could invest £2,880 each tax year and the taxman adds £720.

Note: These figures represent your annual allowance for pension purposes. Even so, there is also a ‘growth time allowance‘ set currently at £1,073,100 million. It refers to the total tax-free amount you can save in a personal pension in your lifetime.

Fund Charges for Setting Up a SIPP

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:

  • Setting up a SIPP pension: Fees range from £300 to £500 to set up a self-invested personal pension plan.
  • Annual management fee: Some SIPP providers do not charge for this yearly cost, but it could be up to £1,000.
  • SIPP dealing charges: You get charged a fee every time you buy and sell an investment. This is generally around £10 to £13 per trade.
  • Exit fees (transfers): Moving money into a SIPP from shares or another pension gets charged. The same applies if you move the fund somewhere else – usually around £50 per transfer.
  • Income drawdown charges: Starting a drawdown on your SIPP comes with a charge. The initial set up can cost up to £300 and then up to £150 per year in ongoing charges.

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.

How Safe are SIPP Investments?

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.

SIPPs Explained: Beginners Guide to Self Invested Personal Pensions in United Kingdom