Need-To-Know Guide Explaining SIPPs
SIPP stands for Self-Invested Personal Pension – it is part of the Personal Pension Plan family that is boosted by the UK government, allowing individuals to choose investments for their retirement that are approved by the HM Revenue & Customs (HMRC).
What makes all Personal Pension Plans (PPP or PPS) stand out is that they are subsidised by the taxman – meaning you get tax rebates on your contributions. You are also discouraged from accessing these funds (dipping into the pot prematurely is not encouraged since they’re largely designed to provide for you in your retirement years). You can learn more about PPPs in general on the Wikipedia website.
SIPPs are distinguished from other Personal Pension Plans however in that the HMRC allows them to include a greater range of investment choices, which accounts for their increasing popularity.
The following guide will look into the key ins and outs of SIPP schemes, so you can decide whether this will be the right retirement solution for you.
Why SIPPs Make Sense
SIPPs offer a good umbrella for all your existing pension schemes. If you’ve worked for several employers, you’re likely to have multiple pension plans – by consolidating them under one roof, you can save money on reduced administration fees and benefit from a consistent service.
While this is reflected in pension transfers making up a high percentage of most SIPPs, it must also be said that not all pension schemes are suitable for transfer, such as for example those that carry hefty exit penalties. Do consider this carefully before a switch to make sure you don’t lose out.
Apart from a guaranteed pension that is backed by the tax-man to help you grow your nest egg, the other major boon of SIPPs is that they offer generous benefits for spouses which private schemes cannot match.
SIPP Investment Options
One of the main selling points of SIPPs is that they offer a wide variety of investment funds to choose from. In most cases, self-selected investments offer you the flexibility to tailor your own risk and return ratio, you don’t always get this with some default or cautiously managed funds that come as part of some pension schemes.
In addition, one of the first rules of investment is to diversify to reduce the likely hood of excessive losses – for example, if all your schemes track the FTSE 100 and it suddenly suffers a downfall, this could really make a painful dent in your pocket.
With SIPPs, you can spread your risks by keeping your money in a range of funds, such as UK and overseas equities, corporate bonds, Real Estate Investment Trusts and the Alternative Investment Market.
Plus, as mentioned above, by having a variety of investments all under the same SIPP umbrella with one investment provider, it will be alot easier to stay on top of everything.
SIPP Charges
While SIPPs have the potential to deliver impressive fund growth, as with any investments, it’s vital to be aware of the related charges. This can be made tricky however by the fact that the costs will depend on the type of SIPP and investment as well as level of trading you decide on.
That’s why it’s vital to carefully read the fine print, take your time researching your options and make sure your potential provider explains all the fees thoroughly.
To give you an idea, while full SIPPs normally have flat fees, their administration charges can run to £450 or more per year – the equivalent is 1% for a £50,000 pot.
In addition, you’ll need to factor in trading charges and pay fund fees of up to 1.5%. Typically you’ll pay between £9.95 and £14 for online trades, but this sum can rise to £30 depending on how much you invest.
Nevertheless, a low-cost SIPP can cost as little as 0.25% in a FTSE all-share tracker and 0.8% in managed funds. This is not at all bad when you consider the returns you can make if you invest cleverly.
Conclusion
Saving for your retirement is a long term process – if you’re not comfortable monitoring funds and making regular investment decisions, you could consider putting the management of your SIPPs into the expert hands of an Independent Financial Advisor (IFA) to maximise your retirement finance growth. But do remember, the value of investments can go down as well as up and you may get back less than you invested. The value of tax savings [and eligibility to invest in a SIPP] will depend on individual circumstances and all tax rules may change in the future.
It must also be said that while SIPPs are an extremely efficient tax wrapper, the returns they deliver depend on the right investments held within them – a certain amount of risk is needed to offer good profits, so if you’re not at ease with this then a SIPP might not be the right choice for you.
Without a doubt however, SIPPs do offer great opportunities due to the range of investment choices they allow. Their benefits are demonstrated by the fact that insurance companies are increasingly offering SIPPs instead of traditional personal pensions. Some financial experts even go so far as to say that in the future, SIPPs will become the individual pension plan of choice for the majority of private investors.
About the Author : George Pardew is an independent journalist writing about SIPPs.
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