Our Guide To Self Invested Personal Pensions
Essentially, a SIPP is a pension plan where the investments are chosen by the pension holder, rather than by the provider. This gives the holder far more control over how their money is invested than is the case with a traditional pension.
What is a SIPP?
A Self-Invested Personal Pension (SIPP) is a privately funded way to save for retirement. Savers have control over how their money is managed and invested, and have complete oversight on costs and fees. The money is invested by a SIPP provider on the member’s behalf.
How does a SIPP work?
Self-invested means just that. Investors inform their SIPP provider which assets that want to invest in and how much they want to contribute. This differs from a standard personal pension which limits the savers’ choice of investments. SIPPs are an individual arrangement between the saver and the provider and, unless it is a group SIPP offered by an employer, it is separate from a workplace pension. There are two types of SIPP: the low cost, which offers simple asset classes and comes with no advice, and the full SIPP which provides the entire range of asset classes – including more complex ones – and usually comes with advice or guidance.
How SIPP accounts work
As with any other pension, tax is not charged on any income that is invested in a SIPP. A 40% or 20% tax payer can transfer 100% of their pre-tax income into a SIPP. This potentially makes SIPPs a tax efficient approach to investment. However, you will be restricted from withdrawing money invested via a SIPP until the age of 55.
A huge range of different types of investment can be included within a SIPP. The legislation that covers SIPPs allows any asset to be included, but a small number will be subject to tax penalties. These include residential property, moveable property under the value of £6,000 and exotic assets %28for example, classic cars and art%29. SIPP brokers will generally not offer this class of assets in their accounts.
How to get started with a SIPP investing
In order to set up a SIPP, it is necessary to start an account with a stock broker. Different SIPP brokers will have different schedules of charges for their services. In general, these divide into low cost SIPP accounts and full SIPP accounts. The difference between these is that low cost accounts only include charges for executing trades, whereas full SIPPs also engage the broker in an advisory capacity.
The Pros & Cons of SIPP Accounts Video Discussion
In this episode of Good Money Guide TV we talk to Rebecca O’Keeffe from Interactive Investor and discuss the Pros and Cons of investing in SIPPs. We cover, who they are good for, what Interactive Investors offers through their SIPP account and look at the risks and rewards of investing in SIPPs.
Selecting a SIPP account
- Things to avoid The charges involved in setting up and managing a SIPP can be quite steep. Make sure that you understand how much you will be charged to set up the account, the on-going annual charges, the charge per trade and the transfer out charge. If you select a SIPP broker with high charges for your planned investments, you could end up throwing away a significant amount of money.
- Things to look for Low cost SIPPs can be managed entirely online. Make sure that the SIPP platform provided by the broker has a user interface that you find intuitive. Also, low cost SIPPs typically have a more restricted range of investments than full SIPPs. Make sure that the account that you choose will actually allow you to make all of the investments that you can foresee, including in your SIPP.
Examples of SIPPs
The whole point of a SIPP is to allow individuals greater freedom over how they save for retirement. As a result, there are a huge number of different approaches to setting up a SIPP.
A less experienced or more passive investor could set up a SIPP with a monthly amount being invested into a selection of unit trusts in order to spread risk. By contrast, a more active investor could set up a SIPP with individually chosen stocks and shares in sectors that they fully understand.
Different investors can set up SIPPs according to their own expertise, which includes commercial property, gold bullion or contracts for difference.
How do you put money into a SIPP?
Paying into a SIPP is as simple as filling out a direct debit form along with the requisite forms from the SIPP provider. Employers can also contribute to your SIPP, but they will not be responsible for the administration. You can also transfer any existing pensions into the SIPP.
When can you withdraw money from a SIPP?
Under current law you must be aged 55 or over to withdraw money from a pension, except under very special circumstances such as ill health. From 2028 the age limit increases to 57 years.
Should I invest in a SIPP pension?
SIPPs require a certain amount of investment knowledge and time commitment. Investors must be willing to research the asset classes in which they invest and make important decisions about how to allocate their money, or they will need an adviser who can do so on their behalf. Markets can be volatile and making the wrong decision at the wrong time can wipe out a pension pot just as the saver reaches retirement. Savers must be sure they have the appropriate risk appetite and a full understanding of SIPPs before investing. If you already have a company pension, it may make more sense to increase contributions to that instead of setting up a SIPP. If you are a confident investor, who wants to take control of your retirement savings and consolidate other plans, a SIPP could be suitable.
What should I look for when choosing a SIPP?
Clearly charges are extremely important (see next section), since pots can be eroded quickly by excessive fees. However cheap does not mean good value, so the choice of SIPP should not be based on price alone. The range of funds and asset classes available are also critical. Investors need access to appropriate investment options that match their appetite for risk. While there is no guarantee any company will last the distance, it is worth looking for providers with a strong brand and reputation. In some cases, specialist SIPP providers may be the best choice. It is worth seeking advice before investing.
What are the major SIPP charges to look out for?
Value for money is more important than cost, but clearly excessive charges are a danger to savings. SIPP costs to look out for include:
- A set up charge. Not all providers impose this fee and the amount varies across the market.
- An admin fee is the annual charge to cover running the SIPP. Again this varies and investors should compare the market before investing.
- Dealing charges apply to the buying and selling of assets. The more active an investor you are, the higher these will be.
- Transfer charges may be applied if you want to bring in additional pension plans.
What investments can be held in a SIPP?
The range of investment options will vary across providers, but typically investors can choose from:
- Individual stocks – company shares registered on a stock exchange
- Bonds – loans made to companies or government
- Unit trusts – open-ended fund which pools investment with others
- Investment trusts – a closed ended investment vehicle where your money is pooled with other investors
- Exchange traded funds – These are basket of stocks that trade on an exchange.
- Deposit accounts with banks and building societies – these provide fixed returns on savings accounts
- Commercial property – investment in office buildings, shops and factories
How much can be paid into a SIPP each year?
You can pay 100% of your earnings into a pension in a year and – under current legislation - receive tax relief of up to 40% on the first £40,000 paid in (the annual allowance). For those earning more than £150,000, the annual allowance is reduced by £1 for every £2 earnt over the £150k threshold until the £10,000 limit is met. There is also a lifetime allowance for total pension savings above £103 million, after which contributions will be taxed at 25% (55% for lump sums).
Are SIPP account profits tax free?
Yes. SIPPs are free from capital gains tax and income tax, but investors pay stamp duty when they sell shares.
Who is responsible for my SIPP making money?
Usually SIPPs are execution only. This means that unless the investor sought independent financial advice when allocating their money, the risks lie solely with them. Certainly in the beginning, it can be sensible to invest via a unit or investment trust rather than buying shares directly since a professional asset manager will make the stock selection decisions on your behalf. The SIPP provider is responsible for administering the plan and ensuring your money ends up as intended.
Do I have to choose all the investments in my SIPP?
In an execution only SIPP, the provider will offer no advice on where to invest and savers might need support from an independent adviser. Full SIPPs may include some advice from the provider, while robo advice SIPPs will take all or some investment decisions on the investor’s behalf. There is no obligation to invest in all the asset classes on offer and it makes sense to choose those with which you are familiar.
How is my retirement income paid from a SIPP?
From age 55, you can withdraw 25% from the SIPP as a tax-free lump sum. The remaining pot can stay invested within the SIPP investment and you can take an income to suit you, or you can move to an alternative provider that offers flexible drawdown. Finally, you can buy an annuity which locks the money away and pays a guaranteed income for life.
Can you transfer money in from another SIPP or pension?
Most SIPPs will let you transfer pensions in. However not all plans let you take your money out and even if you can transfer, you will likely pay charges. The rules and fees will vary across providers. If you have a final salary (defined benefit) scheme with your employer with a pot of £30,000 or more, you will need the transfer approved by a regulated adviser.
Can a SIPP be inherited?
Yes. Pensions can also be passed on death free of inheritance tax. If you die before age 75 your beneficiaries do not pay any tax on the withdrawals and can take it all in a lump sum if they choose. If you die after age 75, withdrawals from the pension are charged at the recipient’s marginal tax rate.
Are SIPPs safe investment accounts?
SIPP providers are essentially just ferrying your money to external managers, banks and stock markets so if they go bust, your investment should be safe. However, any investment in the stock market is not protected and should there be a crash the money will be lost. Money invested with external fund managers is protected under the Financial Services Compensation Scheme up to £50,000 so if the provider goes bust, you will be compensated. Cash is covered up to £85,000. As with any investment, SIPPs involve risk and you should be fully aware of the downside before committing any money,
Why SIPPs are managed online
Pretty much all SIPPs are managed via the internet. This is in part thanks to the time of their conception, but also because of the amount of transfer activity that takes place. The interaction between countless savers and institutions means digital transactions are imperative to monitor what is going on and to execute deals as quickly as possible.
What are robo advice SIPPS from digital wealth managers?
It is early days for this market but robo advice SIPPs offer more support to savers. conducted exclusively online, these are called SIPPs, but they are more heavily managed by the providers than the traditional plans. Typically, robo advice SIPPS rebalance portfolios, make investment decisions and offer more advice, rather than leaving savers to their own devices. These may suit first time SIPP investors not yet ready to make investment decisions.
Best SIPP for beginners and smaller investors
- AJ Bell Youinvest SIPP
- Nutmeg (robo advice)
- BestInvest, The Best SIPP
Best SIPP for all rounders
- Hargreaves Lansdown, Vantage Sipp
- Charles Stanley Direct
- Alliance Trust Savings
Best SIPP for larger sums and experienced investors
- Interactive Investor, SIPP Investment Account
- Barnett Waddingham SIPP
- Curtis Banks, Your Future SIPP
Best low cost SIPPS
- Fidelity low cost SIPP
- AJ Bell Youinvest
- MoneyFarm Pension (robo advice)