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What is a Self-Invested Personal Pension (SIPP)?

What is a Self-Invested Personal Pension (SIPP)?

If you are thinking of saving for your retirement, you will find that there are many options out there. State pensions, workplace pensions, personal pensions… there are various ways of ensuring you have an income for your retirement years.

Self-invested personal pensions (SIPP) are a tax-efficient retirement savings account. They are similar to standard retirement pensions in that they enable you to save, invest and grow your money for when you retire. However, they provide more freedom and flexibility in the way you choose to manage your retirement fund.

What are my retirement pension options?

If you have already taken an interest in retirement pensions, you are most likely aware that you have access to a state pension (from the government) as well as a workplace pension (from your employer).

A state pension is a regular income paid to you by the government when you reach State Pension age. The amount you get depends on your National Insurance contributions; you can find out more here. A workplace pension is a retirement savings account that both you and your employer contribute to. Not only does a percentage of your wages go into your pension automatically each pay day, in most cases, your employer will also contribute as will the government through tax relief. Therefore, if you already have a workplace pension, it is best to prioritise your contributions there first because your employer’s contributions will boost your savings considerably.

On top of these pensions, you can also set up a private pension with providers such as Aviva or Legal and General. With private pensions, you pay however much you want into a pot (which usually qualifies for tax relief) and earn compound profits.

With all these schemes already in place, why bother with a SIPP?

There a several reasons why you would want to set up a SIPP on top of your other pensions, for instance:

  • You are self-employed and haven’t got a workplace pension
  • You’ve already reached the maximum amount you can put into your workplace pension
  • You want to manage all your pensions in a single account
  • You want to choose the funds you invest in rather than restrict yourself to those offered by private pensions

How are SIPPs different from other retirement pensions?

SIPPs provide you with more control and more flexibility than standard retirement pensions. For instance, investment options with SIPPs are much wider than with any other pension type.

You can choose to invest in a wide range of assets such as:

  • Company shares
  • Collective investments
  • Investment trusts
  • Property and land

You can also choose and manage your investments yourself or pay an authorised financial adviser to help you.

How does tax relief on SIPPs work?

Contributions made to your SIPP qualify for tax relief which means that the government boosts each of your contributions. Below is an illustration of how much a £100 contribution actually costs you depending on your tax bracket.

 

Your contribution

Basic rate tax relief

Extra relief

Cost for each £100 contribution

Basic rate taxpayer

£80

£20

N/A

£80

Higher rate taxpayer (40%)

£80

£20

£20

£60

Additional rate taxpayer (45%)

£80

£20

£20

£55

 

Basically, a £100 SIPP contribution will only cost you £80 as a basic rate taxpayer, £60 as a higher rate taxpayer and £55 as an additional rate taxpayer.

Which SIPP provider should I choose?

Not all SIPP providers offer the same investment opportunities so you will need to do your research and find what is best for you.

SIPP providers also charge various fees which you will need to compare, namely:

  • Annual management fees: these are either a fixed fee or a percentage of your pension pot
  • Dealing charges: these are usually applied whenever you buy or sell investments
  • Annual administration charges or platform fees: these don’t apply systematically and can either be a flat fee or a percentage.
  • Exit fee: should you decide to transfer your SIPP to another provider, you could be charged a fee. Make sure you are aware how much it will cost you as this could be very costly
  • Drawdown charges: these are applied if and when you decide to withdraw money from your SIPP.

Therefore, in order to choose the best SIPP provider for your needs, you will need to identify:

  • The funds you are interested in investing in
  • The providers who offer these investment opportunities
  • The most cost-effective provider with the most transparent policy

Are there any risks to investing in a SIPP?

There aren’t any risks per se but there are definitely things you need to consider before making up your mind.

If you choose to set up a SIPP, bear in mind that:

  • You are responsible for making your investment decisions yourself – unless you hire an adviser to do so on your behalf
  • You will need to spend time choosing and managing your portfolio which is why…
  • SIPPs are only suitable for those who understand (and ideally have experience) investing
  • Charges are usually higher than with a standard pension (flexibility comes at a price!)
  • There is a limit on how much tax relief you can get

Self-Invested Personal Pensions are a great way of optimising your savings for your retirement years. They are tax-free and provide you with all the freedom and flexibility you require as a seasoned investor.

Last Update on 06/10/21

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