Everything you need to know about SIPPs
A SIPP is a self-invested personal pension plan, whose owner (the investor) can actively manage how their pension pot is invested. Typically, in the UK, the standard personal pension is managed for you using a limited number of investments; whereas a SIPP gives you the freedom to manage your investments yourself with a wider range of funds to choose from.
A SIPP can be managed in a few different ways, each with varying emphasis on the control of the investments in the portfolio. The SIPP investor can have the benefits of a SIPP wrapper, which protects the investment contributions from income tax (via a contribution from HMRC).
Lost a pension? A SIPP can help with that
Research says that 70% of people said they had either lost track of a pension/s or know where they are but not what they’re worth, leaving 64% worried about not having enough money in retirement.
Using a dedicated SIPP will decrease the likelihood that your pension savings will be split up over time into different accounts.
What types of SIPP are there?
There are two types of SIPPs, the full SIPP and a stripped-back low-cost version. The main difference is that with a full SIPP, the investor can get advice from their provider and have a more complex investment portfolio which can include complex assets such as commercial property.
A low-cost SIPP will provide a stripped back investment service where you are in charge of the investment/s. These are typically mutual funds, equities, investment trusts, and exchange-traded funds. However, both options provide the investor with a plan to combat not having enough money saved for their retirement.
Does the government contribute to your SIPP?
In the UK, the tax authorities (HMRC) top-up personal contributions to your SIPP at the basic rate of tax. For Example, if you were to deposit an £80 contribution your SIPP would receive an additional £20 from HMRC.
Your SIPP provider will carry out this tax reclaim on your behalf automatically for each contribution you make, usually every month. It is possible if you are a higher rate taxpayer to reclaim an additional contribution from HMRC matching the rate of tax you pay (e.g. 40%), these are paid back to you in the form of a tax rebate or adjustment to your tax code.
FSCS protected
The Financial Services Compensation Scheme can provide some protection for the cash and assets you may hold in your SIPP; they state ‘where an investment was held within a personal pension (e.g. a SIPP) or a Defined Contributions OPS, and the UK-regulated provider of the investment fails, FSCS may be able to pay compensation up to £85,000 per pension scheme member’.
With all the risks associated with investing of all types, the investor must have undertaken research and picked the best approach weighing up cost, risk, and longevity. Alternatively, you can seek professional advice to help you decide whether a SIPP is right for you.
Not for everyone
For some people, SIPPs are a great way to save money for retirement in a controlled and flexible manner. They are useful for those wanting to start saving privately, or for somebody wanting more control over the savings for their future.
It may be the case that you wish to take control of your own retirement savings. However, a SIPP is not risk-free, particularly if you are not used to managing your own investments. Before investing you need to be fully aware of the investment choices you make, as your capital will be at risk once you make an investment in the majority of assets available to you.
Additionally, if you do choose to manage your own SIPP, it can be time-consuming and there could be charges for transferring your existing pension to a SIPP. It would be wise to choose a SIPP provider who has good online management tools to help you manage your SIPP effectively.
