A SIPP or a Self-invested Pension Plan is a flexible UK personal pension plan that allows you to manage your retirement savings flexibly. It also gives you more control to tailor your investment decisions and align them effectively with your risk capabilities and retirement goals. You choose to invest to create the fund. SIPPs are the best option for people who wish to participate in their retirement investment-related decisions actively.
This guide will help you understand the complete system of Self-invested Pension Plans. From helping you understand what a SIPP pension is, the different types of SIPP, and the pros and cons, we will cover all aspects to help you make the right choices.
Pension savings in SIPP
Let’s start by first understanding what a SIPP pension is. Unlike traditional schemes, it is a pension scheme type where you can consider different investment options, including property, mutual funds, stocks, and bonds. This means you have more control over your retirement savings and also helps you take advantage of pension-related tax benefits in your investment portfolio.
When you open a standard personal pension, you must ensure that your monthly pension contributions are made on time. The pension providers take care of all the other aspects of your investment. However, the investment decisions are yours in a typical Self-invested Pension Plan. It is more like a DIY role where you must be proactively involved in decisions.
While it works out a cheaper way of growing your retirement savings, it is imperative to mention that such decisions should not be based on costs alone. Consulting with financial experts is ideal to make your investment strategies actionable.
Different types of SIPPs
- Full SIPPs
In this case, the range of investment opportunities is much wider. You also get support so that your choices and decisions are well-informed. The fees are higher for full SIPP, so if you have larger pension funds, this is the correct form of SIPP.
2. Low-cost SIPPs
In this case, a SIPP can be started with small funds, such as £5,000. However, low-cost SIPPs may not offer investment support, and you will be in charge of managing your funds on your own. Alternatively, you can seek the help of a financial adviser.
Advantages of SIPP
A SIPP setup can be beneficial in numerous ways.
SIPP Consolidation: With a SIPP account, many pension pots are combined into one. Managing and tracking your pension plans becomes streamlined, especially if you have multiple schemes from previous employers. The other advantage is that it is easy to assess whether you are closer to your lifetime allowance.
Flexibility: A Self-Invested Pension Plan also allows you to tweak and adjust your pension fund based on changing retirement goals or present-day needs. You even have the flexibility for SIPP payments. For example, you can choose to take a break from payments when required and later contribute a lump sum amount to compensate. Additionally, your choices of funds from your SIPP providers are not limited. This means you can take risks based on your capabilities to grow your investment.
SIPP Cost Efficiency: Another added advantage of the SIPP setup is that the management fees may be lower than those of other pension schemes.
Disadvantages of SIPP
Higher probability of errors without professional assistance: Since the control is in your hands, and all decisions related to the SIPP are yours, you have the onus when things go entirely wrong. If you do not have the financial acumen required to make the right choices or do not have enough time to dedicate to your Self-Invested Pension Plan, you can make mistakes. Therefore, consulting with financial advisors who can help you make winning choices is wise.
Pension rules of SIPP
The rules for SIPP setup are as follows –
- You should be less than 75 years old to open a SIPP or contribute to it.Â
- A SIPP can be opened for a dependent. In Junior SIPP’s case, the person whose name the SIPP is opened should be less than 18 years old.
- Contributions to another person’s SIPP are allowed, provided the SIPP is set up by the other person. This rule permits contributions to your spouse’s or parents’ SIPPs.
All other rules, as applicable for standard pensions, also apply to SIPPs. You can access the pension pot only after attaining the permissible age. Annual and lifetime allowances, tax relief benefits, and tax-free growth rules are the same.
Tax Relief on SIPP
Paying into SIPP attracts tax relief, as does any defined contribution pension. The relief is obtained at the highest rate of tax: 20% for basic-rate taxpayers and 40% for high-rate taxpayers.
Since SIPPs inherently work as an investment portfolio, contributions to SIPPs are considered one of the best ways to invest in various assets tax-efficiently.
How to Set up a SIPP?
You can speak to a SIPP provider to get started on the process. The better approach is to ask experts for financial help so that you can choose the right providers to create result-oriented investment strategies and choose from the best SIPPs in the UK.
Setting up a SIPP includes the following steps –
- List all your existing pensions. Identify the ones that can be moved into your Self-Invested Pension Plan.
- Next, you need to decide about your risk-taking capabilities. Remember, you can take more risks if you are younger, and vice versa. Also, at a younger age, you can earn more. More risks translate into higher rewards with time. Investing in low-risk SIPPs may not always be the right choice because you may not earn too much from such investments.
- Next, decide on where and how to go about investing your funds.
- Finally, decide if you will manage the SIPPs on your own or hire a financial adviser. In the latter case, the financial advisor will make the day-to-day decisions, but they will also ensure that the investments are aligned with your objectives and goals.
What Investments Can be Added to SIPP?
SIPP offers an extensive range of investment opportunities compared to standard personal pension schemes. To maximize your tax benefits and create the best SIPPs in the UK, you can choose from the different assets like –
- Government securities
- Individual stocks and shares
- Investment trusts
- Insurance company funds
- Unit trusts
- Endowment policies
- Traded
- Commercial property
- Some NS&I products
- Deposit accounts with banks and building societies.
Property investment through SIPP
If you choose, you can invest in commercial properties through your SIPP setup. You can use funds from your pension pot to buy the property. When the property’s value increases, your pension fund will benefit. The pot will also receive the rent of the property.
Another excellent use case is if you have a business. You can use your SIPP funds to buy premises for the business. You can increase your retirement savings by paying fair rent on the premises (the rent is deposited in the pension pot).
Residential properties cannot be bought directly using your SIPP. However, certain SIPPs permit the purchase of residential properties through REITs or real estate investment trusts.
SIPP charges
All pension funds require management fees, but since you mostly manage SIPPs, the management fee is significantly less than standard pension schemes. The fee components are usually the following –
- Platform fee: This is the charge of the SIPP provider and is called the annual administration charge. It can either be an annual fee charged at a flat rate or a certain percentage of your investment. For certain Self-invested Pension Plans, a platform fee may not apply.
- Holding charges: These are charges for holding your funds. They can be a percentage or a flat fee. SIPP providers generally charge the platform fee or the holding charges.
- Dealing fees: You must pay this fee when you trade in shares. It is usually around £10 per transaction, but it can be quite high if you do a lot of trading.Â
- Exit fees: This applies when you transfer from one SIPP to another SIPP provider.Â
Remember, the fees will depend on the SIPP type you use.
Conclusion
Setting up a SIPP gives you flexibility and control over your retirement savings. It’s a smart way to manage investments and potentially save on costs. Understanding different types of SIPPs and their benefits helps align your pension with your goals. For expert advice on pension matters, professionals like TaxCan and Cangaf Ltd. can assist you effectively.
FAQs
What happens to my SIPP when I die?
If you die and funds are left in the pension pot, a beneficiary chosen by you will inherit the remaining funds. The treatment is the same as any other pension pot.
Should I move my final salary pension to a SIPP?
The final salary or defined benefit can be transferred to your SIPP. It means you trade your salary for a defined fund in the pension pot. You should speak with a financial advisor to decide if this is the best choice for you.
How safe is a SIPP?
Like the volatility in the stock market, your SIPP asset values can also rise and fall. However, in the long term, you can expect positive growth in most cases. If the SIPP provider closes its company, your funds are protected. That’s because the provider simply manages your funds but does not hold them. Similarly, if banks or your fund managers go bankrupt, the Financial Services Compensation Scheme will intervene and pay up some of your losses (up to a maximum of £85,000). If cash is held in the SIPP, it is safe, too, up to £85,000. A SIPP is relatively safe and less risky than a defined contribution pension scheme.
