What is a self-invested personal pension (SIPP)? Is it really worth investing into? What are the benefits and drawbacks of having one?
In today's blog I will explore what a SIPP is and why you may want to start using one to better manage your future retirement fund.
What is a Self Invested Personal Pension?
A SIPP is a tax-efficient way to grow your retirement savings. Unlike other types of pension funds, such as occupational or private pensions, a SIPP allows you to invest your own money in stocks of your choice. This means you can choose where to put your savings, rather than being restricted to the options offered by your employer.
Having a pension fund through a companies workplace pension often only provides some set options for your investments where you can't control exactly what you're putting your money into. For example, if you have an employer pension that offers shares in certain companies, then you won't be able to buy any other shares. With a SIPP, however, this isn't the case. You can pick and choose which companies you want to invest in, so long as they meet certain criteria.
You can start saving for retirement at any age, but the earlier you start putting into a pension fund, the better. The longer you wait, the harder it becomes to accumulate enough money (This goes for any type of long-term savings).
The SIPP Rules
There are some rules when it comes to a SIPP similarly to how there are rules for the typical pension scheme. See below the different rules for your pension contributions and withdrawals.
Pension Contributions
When it comes to your contributions, you are allowed to contribute 100% of your annual income into a SIPP. This is up to a maximum allowance of £40,000 per year (£10,000 each month), although many people don't make use of all their allowances.
If you do exceed the limit, you'll need to pay additional taxes. On any pension contributions below the given allowance, you will receive an additional top up from the tax benefits helping grow your pension pot faster. This tax relief is one of the main benefits to using a SIPP as your primary pension pot.
Pension Withdrawals
When it comes to withdrawing funds from your SIPP, you must wait until you reach Age 55. In order to withdraw your money, you must be aged 55 years old. At this point, you can take out up to 25% of your total investment value before having to pay taxed.
You are allowed to withdraw from the fund even if you are still working , but you should consider whether or not you would like to continue contributing to the fund after reaching age 55.
The SIPP Pros and Cons
As there are many pros and cons of investing in a SIPP, I have provided a general breakdown of what I consider to be the main factors that may influence your decision on investing through a SIPP.
Pros
- You can invest in a wide range stocks and share classes including foreign stocks.
The most common type of stock is the American Stock Exchange (NYSE) or NYSE MKT, which allows you to buy shares of a company that trades on the exchange. The NYSE is the largest stock market in the United States. It has more than 2,000 listed companies and over 1,200 securities firms. Most SIPPs allow you to access the US stocks providing a broader choice of investments.
- You don't have to worry as much about taxes with a SIPP.
You can invest the money in whatever way you want, and it's not subject to capital gains tax (although there are other costs associated with SIPPs). The tax relief gained from investing through a SIPP make it a great choice if you know your investments aren't going to be accessed until your 55 anyways.
- You can decide where your money goes with a SIPP.
The first thing to consider is whether you want the flexibility of investing in shares, or if you’d rather have more control over how your money is invested. SIPPs provide this ability by allowing you to pick the exact companies that you are wanting to invest in instead of generic 'basket' investments such as ETFs or other mutual funds.
Cons
- There are fees involved with opening and managing the account.
The fees for opening a SIPP really depends on the provider you go with. We have listed some providers of SIPPs in the next section of this post. Although there are tax advantages to using a SIPP they are not completely free, check with your provider to see the fees you will pay on your investments.
- It takes time to build up an investment portfolio.
Like any retirement investments, it takes time to build up your portfolio. This means that you won't get instant gratification when you start investing. You will also have to monitor your investments closely to ensure that you are getting the best returns possible.
- Your investments are not guaranteed.
Just like any investments you may be picking yourself, our investment returns are not guaranteed. Just as you can make money, you can lose money too. Your investments could go down just as easily as they could go up. If you choose to invest in a SIPP, then you need to understand that you are taking a risk.
SIPP Providers
I've listed below some of the providers of SIPPs. There are many others out there so do your research before choosing one.
Barclays SIPP - Barclays SIPP is a great choice. They charge a yearly fee of 0.2% on funds and 0.1% on other investments with a set free of £31.25 plus VAT per quarter. This comes to about £125 + VAT per year. Although this may seem somewhat expensive, they provide great flexibility allowing you to choose from over 2000 funds, ETFs and Shares.
Vanguard SIPP - Vanguard offers their SIPP which allows you to invest in over 75 low-cost funds. They include ranges made specifically for growing wealth for retirement. The charge a small fee of 0.15%, with this being capped at £375 per year
Freetrade SIPP - Freetrade offers one of the best options for SIPP investing. They charge a set fee of £9.99 per month and if you already have a plus membership, you will receive a 30% discount on this price. They also provide great flexibility with thousands of UK and US stocks and ETFs. They are also expanding their range of investments all of the time and even allow fractional shares.
Summary
If you're looking for a flexible way to save for retirement, look no further than self-invested personal pensions. These accounts give you complete control over your pension savings and investment decisions. They are easy to open and manage and offer great flexibility. However, they aren't free and come with a number of costs associated with them. It's important to weigh up these costs against the benefits of having a SIPP before deciding whether or not to use one.
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FAQ
How are SIPPs different?
With a SIPP, you choose and manage your own investments or pay an authorised financial adviser to help you.
Source: (moneyhelper.org.uk)
Who can open a SIPP?
Anyone who is a UK resident or is a Crown employee or their spouse or civil partner who is working overseas and is under 75 can open and pay into a SIPP. You will be making your own investment decisions, so you need to be confident in what you are doing and prepared to do the research that goes with running your own pension scheme.
Source: (youinvest.co.uk)
How can contributions be paid?
Contributions to the Close SIPP can be made in the form of a single one-off payment or by way of regular contributions via Direct Debit. Regular contributions can be made on any date between the 1st and 28th of the month. Member contributions should be made net of basic rate tax. Employer contributions should be paid gross. The payment must be accompanied by a Close SIPP Employer Contribution Form. No contributions are accepted after age 75.
Source: (closebrothersam.com)