What is a SIPP? A brief introduction.
A SIPP, or Self Invested Personal Pension, is a type of personal pension that can provide you with more control over your retirement planning because it provides you with added flexibility to choose and manage a wide range of investments within your pension.
Traditional personal pensions tend to offer between a dozen and several hundred insurance company funds. SIPPs can offer even greater flexibility because they will often allow you to choose from several thousand funds, alongside direct investment into company shares, commercial property, cash deposits and other investments.
Costs and charges on pensions can vary hugely, but the greater investment options in a SIPP could provide better value for money. This is because the way your investments perform can have a big effect on the size of your pension fund and eventually on your retirement income.
You may also use a SIPP to merge different schemes (e.g. from former employers) into one as this can make keeping track of your retirement funds a lot simpler.
So, in summary, SIPPs have the potential to provide you with a flexible way to save for your retirement, but not all SIPPs were created equal and they will not be suitable for everyone. It is always recommended that you should take professional financial planning advice to ensure that you have the right pension plan for your needs.
Who can open a SIPP?
Anybody over the age of 18 can open a SIPP. Whether you are unemployed and/or do not expect to make regular payments, you can open a SIPP.
To open a SIPP, you must be a UK citizen, although non-UK residents can hold one. Unless you are a taxpayer in the United Kingdom you will not earn tax relief on your contributions.
After hitting the age of 55 (57 from 2028) you will have a wide set of pension benefit withdrawal choices.
What are the tax benefits of contributing to a SIPP?
You will reap the same tax effective advantages as other types of pension:
- Each year you can receive tax relief on up to 100% of your earned income (capped at £40,000). In brief, this ensures that everything you pay is supplemented by the government by an extra 20%. This is covered in the overall allowance, and therefore maximum you can pay into your SIPP from your own funds is £32,000.
- As an example, if you were to pay £8,000 as a pension contribution, the amount available to invest in your SIPP would be £10,000 as the government would add the extra £2,000 to your contribution.
- Higher rate and Additional rate taxpayers can file a self-assessment tax return to seek further tax relief.
What can I invest in?
A SIPP allows you to invest in a broader range of assets than conventional pension plans. Some savers invest in all sorts of investments in their SIPPs, from pubs to grain stores. There is a wide variety of approved SIPP investments.
Here are the typical investments:
- Exchange-listed securities and shares: Either UK or abroad. The performance of such securities depends on the success of the business and on the economic environment. When the company is successful and there are positive business dynamics, the returns can be lucrative.
- Government gilts, corporate bonds, and other fixed interest stock: Corporate bonds are loans issued to a company to support its expansion. Gilts are loans made to the government. At a pre-specified date, both the company and government repay your respective loans with interest.
- Insurance bonds or funds: These can be standard whole life, or term life, insurance policies, sold by insurance providers.
- Exchange-traded funds (ETFs): ETFs are a collection of securities offered on a broad range of asset classes from the conventional investments to the less common assets, like currencies and commodities.
- Deposit accounts with banks and similar finance institutions.
- National Savings products: such as Income Bonds.
- Commercial property: Features offices, shops, warehouses, pubs, factories, grain stores, etc.
- Land: Agricultural land and plots of land, such as parking lots
SIPP vs other personal pensions
The main distinction is freedom. You determine how and where your retirement funds are being invested and a SIPP aims to provide a broader range of investment options compared to most personal pensions.
Making contributions into a SIPP
- You can contribute to a SIPP, and/or your employer can.
- Contributions may be regular (e.g. monthly) or one-off.
- The statutory annual limit is 100% of your UK earned income (capped at £40,000 gross).
- If you do not have any UK earned income, or make less than £3,600 a year, you can still contribute up to £2,880 a year and receive up to £720 in tax relief.
What happens to my SIPP when I die?
When you die, you may pass on your pension fund to your chosen beneficiaries, which is a tax-efficient way to manage your estate.
You need to submit a ‘Statement of Wishes’ to your SIPP provider so that they have an idea of how you want your pension plan to be allocated.
If you die before your 75th birthday and the funds are transferred within two years of your death, your pension pot will be passed on to your beneficiaries tax-free.
If you die after your 75th birthday, and your beneficiaries want to access your pension, they will pay income tax, with the rate dependant on their other income and amount they draw from your pension
Can I transfer my existing pension to a SIPP?
Yes, transferring your existing pension into a SIPP is something you can do. Before deciding to do this, you should review the rules and benefits of your current scheme, including possible exit costs, whether you will be giving up valuable guaranteed benefits, and the charges of your plan.
You could undertake the transfer yourself, however, as pensions experts, we can help you understand what pension benefits you may lose and earn as a result of transferring to a SIPP. We aim to take the stress out of this process and save you time.
Is a SIPP right for me?
A SIPP may be right for you if you want to have more control and flexibility to invest in a wider range of investments in your pension. It really depends on your personal financial circumstances and what your objectives are for retirement. We can help you decide whether a SIPP is the right solution for your retirement.
How can I open a SIPP?
You can directly contact a SIPP provider, and they will lead you through the application process. The quickest way to do this is often online.
Seeking advice from an Independent Financial Adviser (IFA) is a more prudent approach. An IFA will help you find the right provider for your requirements and help you to build a retirement plan.
How can Churchgates help?
As Independent Financial Advisers (IFA) we are qualified to help you figure out whether investing in a SIPP is right for you and your circumstances. It is our policy to offer a free initial meeting (face to face or video call), where we can find out more about you and your requirements and for you to find out more about us and the services we offer. To request a free initial meeting please complete our contact form.
