Understanding self-invested personal pensions (Sipps)


If you’re looking for greater say in how your pension fund is managed, then a self-invested personal pension Sipp could be the perfect option for you.

It enables you to decide exactly how you invest your pension pot giving you the choice of a wide variety of different investment types. These important investment decisions can be made either on your own, or with the help of independent financial advisers.

Investment freedom

Opting for a Sipp pension  you won’t be restricted in the same way with the limited fund range which is offered within an ordinary personal pension or stakeholder pension.

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In fact, the range of investment opportunities available to you with a Sipp are so diverse you can build up a rich and varied investment portfolio. As an investor you’ll be able to choose from an array of investments including unit trusts, investment trusts, government bonds, corporate bonds, exchange traded funds (ETFs) and securities quoted on a recognised stock exchange, amongst others. You can even invest in commercial property.

For the investment savvy there is huge scope to build up a considerable retirement nest egg.

What are the rules?

Existing pension plans can be moved into your Sipp, free of tax, providing the annual contribution does not top £255,000.

The maximum you can pay in during one year will be limited by your gross pensionable income. As is the case with any other pension investment, this money will count against your tax bill.

All residents of the UK are eligible. For those residing overseas one can be set up for the purposes of receiving transferred benefits from another UK registered pension scheme.

Are there any tax benefits?

When you make a personal contribution into your Sipp, this will be done “net” of basic tax rate. This basically means that you’ll benefit from 20% tax relief on that contribution.

When you make a contribution into your Sipp (this could be cash or an asset) it will be valued. It will then automatically get a 20% tax credit. Taking the example of an asset valued at £80,000; the taxman will then make this up to £100,000. The extra £20,000 will be in cash which can then be turned into shares or other investments or kept in the bank account section of your Sipp.  

Can I change my investments?

One of the real advantages of a Sipp is flexibility. You can choose and change your investments whenever you want. It’s often referred to as a “do it yourself pension” as it’s all down to you. You make the decisions when you first set it up and throughout. All the decisions can be down to you, or you can also enlist the help of a financial adviser.

With many of the top Sipp providers you can even do this online for most investments.

When can I start to enjoy the benefit?

You can start to enjoy the benefit of the money you’ve accumulated in your Sipp once you reach 55. At that point you’re free to make decisions on how you’ll draw your fund to benefit you during retirement.

You can initially draw a tax free lump sum of 25%, with the remainder able to be drawn as an income. You can even decide to take your income through the purchase of an annuity.

Is it right for me?

Opting for a Sipp can be extremely financially beneficial. It’s important to get the right product for your circumstances so worthwhile talking to a financial advisor before making the final decision.