Investing Basics: What is a SIPP and is it right for me?

 

A Self-Invested Personal Pension (SIPP) could be the answer for the confident DIY investor looking to take full control of their retirement planning by Christian Leeming

 

First introduced in 1989, Self-Invested Personal Pensions (SIPPs) have grown in popularity and are now used by over one million investors in the UK to save for their retirement. SIPPs are tax-efficient ‘wrappers’ that are put around investments to ensure they benefit from the considerable tax advantages that pension savings attract.

A wide range of investments may be held in a SIPP – from shares, unit trusts and bonds to commercial property, gold bullion and securitised derivatives – and the decision on what and when to buy, and when to sell is the investor’s to make. Successful investment choices may achieve a much bigger pension fund and retirement income than other types of pensions.

‘now used by over one million investors in the UK to save for their retirement’

If you want to make your own investment decisions rather than relying upon a pension company to decide where your pension savings are invested then the freedom of a SIPP allows you to control where your money goes and how it grows.

In many ways a SIPP is the ultimate DIY pension product, allowing the investor to make their own investment decisions and retain total control; however, with your quality of your life in retirement the ultimate reflection of the success or otherwise of your investment strategy, this may not be the product for the faint hearted; it is wise to be sure that you are comfortable with such responsibility before taking the plunge and it may be worth taking professional advice at this point.

Online investment platforms make it very easy to open a SIPP, schedule contributions, make ad hoc contributions, select investments and manage all aspects of valuations and governance; many of the brokers featured on this site will either offer their own SIPP product, or will have a SIPP Dealing Account that will allow you to make contributions, manage your investments and appoint a trustee to administer your pension on your behalf.

‘In many ways a SIPP is the ultimate DIY pension product’

A SIPP can be a useful vehicle for people who want to consolidate all of their occupational and personal pensions into a single pot before they retire, or for those who want to keep their money invested after they retire so that they can derive an income from it.

The 2015 pension freedoms encouraged more people to opt for a SIPP  so that they could start to actively manage their fund before they reached retirement.

 

SIPPs – Permitted Investments

 

SIPPs offer a wide range of permitted investments which may appeal to those that find the investment choices offered by personal pensions or stakeholder pensions too restrictive.

 

• UK stocks and shares, including those listed on AIM
• Unit trusts and OEICs recognised by the Financial Conduct Authority
• Overseas stocks and shares quoted on a recognised stock exchange
• Exchange trades funds (ETFs)
• Unlisted shares
• Investment trusts listed on any stock exchange
• UK government bonds, plus bonds issued by foreign governments
• Gilts and corporate bonds
• Insurance company funds
• Exchange traded funds traded on the London Stock Exchange or other European markets
• Bank deposit accounts including non-Sterling accounts
• Commercial property and land
• Real estate investment trusts (REITs) listed on any stock exchange
• Offshore funds.
• Futures and options
• Permanent interest bearing shares (PIBS)
• Loans
• Hedge funds
• Venture Capital Trusts (VCTs)

 

The different type of SIPP accounts available are described hereunder, but generally the lowest cost wrappers come with the least choice in terms of investment options whereas those that offer access to the full range permissible can come with a hefty price tag; it is worth ensuring that your chosen provider gives you the choice you require, but that you are not paying for access to investments you will never make.

Some providers allow you to make contributions from as little as £50 a month, although those with a wider range of investments typically have a higher minimum level of investment.

Most SIPPs will allow lump sums to be contributed up to the maximum annual subscription which, in tax year 2022/23 is £40,000.

 

SIPPs in Action

 

Like all personal pension schemes, contributions to a SIPP qualify for tax relief up to the highest rate of 45%.

Individual Savings Accounts (ISAs) are similarly tax-efficient wrappers that are sometimes chosen ahead of a SIPP for retirement planning on the grounds of the greater flexibility they offer should the saver require access to their funds before they reach age 55.

The ISA annual contribution limit is £20,000 for 2022/23, and unlike the pension wrapper which sees tax relief on contributions, the ISA is tax efficient ‘on the way out’ sheltering growth from Capital Gains Tax and reducing liability on income earned.

There are discussions afoot to harmonise the tax treatment of ISAs and SIPPs, but in the meantime it is wise to choose the product that best suits your individual circumstances.

‘SIPPs can offer valuable tax relief if you own commercial property’

SIPPs can offer valuable tax relief if you own commercial property as you can effectively ‘sell’ your premises to the SIPP which then frees up funds to re-invest; SIPPs also offer inheritance tax benefits which are explored elsewhere on this site.

SIPP tariff sheets can be long and complex, and whilst headline rates may appear attractive, it is worth digging into any ancillary charges; some may appear punitive, and more than outweigh any initial ‘savings’.

Online brokers often offer a SIPP Dealing Account alongside General Investment and Stocks and Shares ISA accounts, at a very low charge, and then allow you to select from a panel of trustee/administrators that you will need to oversee the custody of assets and deal with all tax issues.

Alternatively, brokers may offer a ‘packaged’ product which includes access to a dealing account, but with an in-built trustee relationship; again these can come with seeming very low charges, but it is always advisable to read right to the bottom of the page.

Fees to set up a SIPP can range from zero to £500 and annual management charges may either be percentage based (typically 0.5%-0.75%) or a flat fee, often between £100 and £500.  

Brokers will have differing charges according to the investments you choose and so it is wise to find the best deal on the investments you are most likely to make; SIPPs may also levy transfer out fees.

 

 

Types of SIPP

 

Full SIPPs

 

Offer the widest choice of investment, but with the highest charges they are really only suitable for people with large pension funds (the average is between £150,000 and £450,000) that are going to take advantage of some of the more esoteric investment opportunities.

Fees may be flat or charged as a percentage of the value of the overall investment; full SIPPs usually charge an initial set up fee, an annual management charge (typically 1% for a £50,000 pot) and trading charges; many providers insist upon a minimum contribution per month.

 

Low Cost SIPP

 

Normally offered by execution only (XO) brokers, low cost SIPPs offer a wide range of investment choice, but limited to those that are ‘on exchange’ or readily valued and traded; they don’t normally allow you to own commercial property directly or invest in offshore funds or unquoted shares; they may be more suitable for people with smaller pension savings to invest. 

 

Fees for low cost SIPPs are lower, with low or no, set up fees, and low annual management fees which may be flat or percentage based; charges levied are predominantly trading commissions for investments within the wrapper and are typically between £10 and £15 a trade– many brokers charge commissions as low as £1.50 for regular monthly investments.

 

Hybrid SIPPs

 

Offered by insurance companies who normally require you to pay a substantial amount into their funds before you are allowed to choose your own assets.

Hybrid SIPPs charge initial set up fees and annual management fees that tend to be capped at around £300 and £600 respectively. They rarely charge dealing fees because, in most instances you are buying into their funds; those that want control over their investments from the start may eschew Hybrid SIPPs. 

 

Is a SIPP right for me?

 

Those with experience of investing that are completely comfortable making their own decisions may consider opening a SIPP.

Some investments that can be held in a SIPP may come with higher levels of risk than you are comfortable with, and as with any DIY  strategy it is for you to ensure that the investments you hold are within your risk tolerance.

For those with no experience of investing, a stakeholder or personal pension may be more suitable; those that do opt for a SIPP should ensure that they are aware of the charges they will incur as fees can eat into smaller savings pots.

Starting early allows the investor to take maximum advantage of the ‘miracle’ of compound interest when reinvesting dividends and returns; ‘little for a long time’, is rarely an inferior strategy to ‘nothing and never’.

Because of their inherent flexibility SIPPs allow an investor to select their own investments, buy a ready made portfolio, or purchase products that are actively managed by an investment professional:
 

Do it Yourself, Do it With me, Do it For me – just don’t do nothing!