What is a Self Invested Personal Pension?
A SIPP (Self-Invested Personal Pension) is designed to allow investors to manage their own retirement savings and is most suitable for those who are confident making their own investment decisions.
A SIPP will allow you to invest in different asset classes and funds, and control how much of your money you contribute and when. You can also change how you have distributed your pension funds within the “wrapper” of your SIPP.
SIPPs are most often used by individuals when working with Discretionary Fund Managers and Financial Advisers, because of the freedom of investment choices they offer. This includes different funds and asset classes, such as discretionary managed funds and commercial property.
How does a Self-Invested Personal Pension work?
A SIPP is subject to the same complex rules for contributions as other pensions in the UK:
- Tax-relief according to your marginal rate
- Annual Allowance – You may save up to £40,000 into your SIPP each year, or up to 100% of your salary whichever is lower.
- ‘Carry forward’ rules allow you to use unused allowances from the previous 3 years
- Lifetime allowance – You cannot save more than £1,073,100 into pension funds during your lifetime. (Figure correct as tax year 2020/2021, but is expected to rise in line with inflation each year.)
What are the advantages and disadvantages of using a SIPP in the UK?
There are many advantages of using a SIPP including:
- Investment choice
- Government tax-relief applies
- Ability to utilise different investment strategies under one vehicle
- SIPPs come with a full range of retirement options, including flexi-access drawdown
- You can use your SIPP in combination with someone else, for example, to purchase commercial property, so they are useful for company directors
However, there are disadvantages, including:
- There may be set-up fees and annual management charges; these will depend on your provider and the plans they offer
- You will need to understand the consequences of any investment decisions and keep up to date with any rules or regulatory changes (for example, whether investments are covered under the Financial Services Compensation Scheme (FSCS))
Should you invest in a SIPP?
If you generate income from multiple sources or if you have a complex financial position, SIPPs may work for you. SIPPs allow you to be efficient in your tax planning, and if you’re confident managing your investments, or working with a discretionary fund manager and/or a financial adviser, you can benefit from their expertise.
While there are many advantages to a SIPP – they are more complex. If you’re looking for something simple and you’re not comfortable with the risk of loss that comes with making your own investment decisions, then a SIPP might not be for you.
A pension is a long-term investment. The value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future. All information is based on our current understanding of current HMRC taxation rates