Guide to SIPPs
Guide to SIPPs
What are they?
SIPP stands for Self Invested Personal Pension. It is a personal pension plan in every sense of the word but has the added advantage that you, as the investor, have complete control over the investment strategy and investments contained in the pension plan.
How do they work?
Personal pensions are usually provided by insurance companies and they often limit your choice of investment to a number of investment funds normally managed by the insurance company. A SIPP should be viewed as a tax efficient wrapper into which you can invest almost any type of financial asset. Although a SIPP may be provided by an insurance company, it can also be provided by specialist SIPP administrators.
The insurance company or administrator will establish the SIPP wrapper which will receive all the tax advantages that are enjoyed by a standard personal pension. Once the SIPP has been set up, you invest your lump sum (or in some cases regular contributions) which initially will be placed in a cash account. In conjunction with an investment adviser, a balanced spread of investments will be purchased, using the capital in the cash account. The list of permitted investments is very wide but includes:-
- UK and international company shares
- UK and international government and company debt (gilts and corporate bonds)
- Collective investment schemes such as unit trusts, pension funds, investment trusts
- Commercial property
- Deposit funds and currency
- Commodities
- Futures and options
- Warrants
- Derivatives
There are some types of assets which, although not strictly banned, are highly tax inefficient for all pensions but which otherwise could be of interest to SIPP investors, such as residential property, works of art and antiques.
How much can I invest?
You will receive tax relief at your highest rate on any contributions that you make and since pension rules were simplified in April 2006, you can contribute up to 100% of your salary up to £235,000 (in the 2008/2009 tax year). Even if you are a non-taxpayer, you will still receive basic rate tax relief on any contributions made up to £3,600 in each tax year.
Is a SIPP suitable for me?
This question can only be answered after consultation with a suitably qualified pensions adviser who will analyse your circumstances taking into account your investment risk profile. In general, however, SIPPs are more suitable for investors who:-
- Require significant flexibility in their pension planning
- Like to be in control
- Want to take a hands on approach to planning their retirement
- Have a specific investment adviser that they would like to manage their portfolio
- Have specific ideas with regard to investment that cannot be met through investing in an insurance company fund
Most SIPP contracts have relatively high minimum contribution levels which means they will appeal more to higher earners and those with significant capital built up in other existing pensions that can be transferred.
There are certain fees involved in establishing and running a SIPP and these are normally explicit. You can expect to pay an initial set-up charge, annual plan fee, initial charge on the investments that you purchase and annual management charge on those investments. In addition to this, you should expect to factor in a charge for any advice that you receive in conjunction with setting up the SIPP and the associated investments.
Anything else that I need to know?
Although initially aimed at higher earners and professional partnerships, there are a number of low cost SIPPs, mainly on the internet, aimed at investors with more modest sums to invest who wish to invest in collective investments and listed shares and who will be unlikely to invest in commercial property. These services are unlikely to provide any advice with regard to the types of investment available and their suitability, including the asset allocation most likely to achieve your personal objectives. In addition, certain types of investment may not be available, for example, commercial property. However, fees are normally lower than those provided by a "full" SIPP.
It is important that unless you are a very experienced investor, advice is sought with regard to the investment strategy undertaken within your SIPP from a suitably qualified, impartial adviser.