SIPP - SELF INVESTED PERSONAL PENSION INFORMATION

What is a SIPP?

A Self-Invested Personal Pension (SIPP) is a Government-approved personal pension scheme. It allows individuals to make investment decisions in a tax efficient way to build a good retirement income.

Similarly to an ISA, a SIPP is a "tax wrapper", allowing the money held within it to enjoy tax rebates. As with other Personal Pension Plans, there are strict rules on contributions and withdrawals, yet a SIPP carries greater range of investments particularly in relation to property and equities.

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What Investments are Available in a SIPP?

A SIPP allows the individual greater control of the investment of your pension money. You also receive more flexibility than a regular pension plan. You may use your SIPP with many investments, including:

  • Stocks and Shares
  • Property
  • Unit trusts
  • UK gilts
  • Bonds
  • Investment trusts
  • Managed Funds

Since 2006, SIPP holders have been permitted to invest in residential property as well as commercial property. Buy-to-let property is now free from capital gains tax while rental income is free from income tax. However, you may not be able to invest directly in residential property – you may be able to do so via a collective investment trust or fund.

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Who Can have a SIPP?

While any individual who meets the below criteria may have a SIPP, they have traditionally been the domain of wealthier people. Generally, a SIPP should have a value of at least £200,000 to be really beneficial.

There is a set of eligibility rules for anyone who wishes to apply for a SIPP. They are:

  • UK resident for tax
  • Aged 18 and over
  • Aged 75 and under

Since April 2006, individuals have been able to pay up to £215,000 into a SIPP each tax year. From April 2010, this limit will rise to £255,000.

However, a large portion of regular people in Britain earn less than this amount – so, if you earn less, the maximum amount you can pay into the SIPP will be dependent on your gross pensionable income. This varies according to person - find out what you"re eligible for when you look around for a SIPP provider.

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Where can I Apply for a SIPP?

You can apply for a SIPP from a range of companies – including unit and investment trust companies, stockbrokers, banks and building societies, financial advisers, insurance companies and more. The best way to find a good SIPP plan is by shopping around. Take your time and search the online market, compare offers and criteria.

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How Much does a SIPP cost?

Most companies who offer a SIPP will charge an annual administration fee and there may be further fees attached to each of the investments within a SIPP.

You might be offered a low-cost SIPP – without the set-up and annual fees – and even though this may look attractive on first glance, it is still worth comparing the full SIPP with others. For instance, other parts of the SIPP might still carry higher fees, meaning the initial saving is effectively cancelled out.

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Tax Benefits

Clearly, one of the main perks of a SIPP is its tax benefits. Any investment in a SIPP is tax free – so if you"re in a higher tax bracket, you could earn a discount of up to 40%. For lower tax brackets, up to 20% can be saving – meaning the tax advantage is certainly worthy.

Individuals are permitted to take a tax free lump sum of up to 25% of the accumulated fund at their chosen retirement age. From 2010, your chosen retirement age can be from age 55 and upwards.

Any money invested in the fund remains not subject to:

  • Income tax

Your SIPP qualifies for tax relief at the rate you currently pay. Any income from your pension is taxable.

  • Capital Gains Tax

Any investments made from your SIPP are fully protected from Capital Gains Tax (CGT).

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Where Should I Invest with my SIPP?

Whichever way invest, it is generally down to personal circumstances and preferences. Therefore, what you choose to do with a SIPP is also down to you. There are questions you could consider before making an investment of any kind, including:

  • How much risk are you willing to take?
  • How much can you afford to invest?
  • Which sectors do you want to invest in?
  • What is important to you?

You may also wish to ask yourself how much knowledge you have – do you need some financial advice and assistance to make the right investment choices? You may wish to use analytical tools or speak to an expert.

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How can I keep Up to Date with my SIPP?

Today, many SIPP providers offer a high-quality service with a lot of guidance. Therefore, many will offer secure internet system which allows you to view your SIPP activity and receive valuations from your provider.

In the past, most SIPPs were accessed merely by way of an annual statement. Find out what is available when you look around for a suitable provider.

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What are the Disadvantages of SIPPS?

SIPPs carry the same disadvantage as any other type of investment – risk. By entering an investment, you immediately put your capital at risk of loss. However, the risk posed by using a SIPP is certainly smaller than were you to place your capital in a highly volatile area like derivatives trading.

  • Low Earners

For people who do not fall into the high taxpaying bracket, SIPPs carry less return than for people earning higher amounts. Indeed, as mentioned before it is generally more beneficial to pay at least £200,000 into a SIPP.

If you are unsure as to your suitability for a SIPP, simply take the matter to an independent financial advisor, who can look at your personal circumstances to determine if you stand to benefit from a SIPP, or whether another form of investment plan (such as an ISA) might be more advantageous.

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