What is a SIPP? and should I consider investing in one?

Years pass and it can feel like your retirement goal when working every day just gets further away. Retirement ages are creeping up with workplace and employer pensions, so what would you think about a Self Invested Personal Pension that unlocks the ability to retire at 55? A SIPP does just that while giving control, flexibility and ultimately empowerment on an investor’s earnings. However, they’re not right for everyone…

What is a SIPP?

A SIPP,  or “self-invested personal pension” works in some ways like a traditional personal pension plan. You can add varying amounts of capital/earnings to the pension when you like and the the government pays an extra 20% on top. This 20% is the personal tax relief. Money invested in a flexible SIPP are is then able to grow without tax liabilities.

Is it worth investing in a SIPP?

Nothing will beat going along to your local financial advisor and asking for a pension review. Most workers in the UK have very little knowledge of what their pension is worth, how it works or what fees and charges are associated with managing it. In fact, in the UK, most requests for pension values (CETVs) are during separations of family estates and assets.

The reasons for the apathy in knowing about this key financial investment is unclear. Maybe we get tied up in our everyday lives and fear thinking too far ahead. In this respect pensions are very similar to wills – few give them thought early enough.

You can read more about why it’s worth making a will today in my article on the importance protecting your next of kin with a digital will.

Whether you’ve not given it thought, don’t understand it, or simply prefer others to manage your finances for you, now could be the time to change your approach using a SIPP. Taking the plunge to move to a SIPP is not risk-free and should only be done after seeking sound professional financial advice as for some who feel insecure in their money management the safe, tried and tested traditional pension might be for them.

A SIPP, in truth, is really for those who understand the fundamentals of investing and what makes markets and funds work.  Ultimately, whilst the return potentials are likely better if you control your own pension assets, fees and portfolios, the risk are higher.

Don’t let this put you off finding out about a SIPP. They can be a great way of amalgamating existing and sometimes forgotten pension pots in to one place that gives transparency and growth potential.

Considerations when thinking about a Self Invested Personal Pension Provider.

Your primary consideration when deciding which SIPP provider is best for you should be flexibility and features. There are high fee providers that offer larger markets and investment options than the low cost providers. Both price points have their pros and cons. However, I like to look for a larger range, just like using a whole market mortgage broker, or insurance comparison service.

It really depends on what you want. Consider your current bank for example, the customer service, mobile app, website and customer feedback will vary compared to others. I’ve loved banking and moving money with Virgin Money, Chip, and First Direct  because I liked the user interface and customer service. SIPP providers will be similar, some will have all the bells and whistles, while others may lack ease of use via clunky websites. Read on to find out the main SIPP providers and consider carefully any perks of your current pension plan before jumping ship and risking exit fees.

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Who is the best SIPP provider?

The financial website Money.co.uk offers a great comparison of the SIPP providers here in the UK. Some of the most popular are included below:

  • Pension Bee Pension
  • Hargreaves Lansdown Pension
  • True Potential Investor Pension
  • Interactive Investor Pension
  • AJ Bell Youinvest Pension
  • Aegon Pension
  • Aviva Pension
  • Royal London Pension
  • Fidelity Pension
  • Alliance Trust Savings Pension
  • Elevate Pension

How much can you invest in a SIPP and what tax relief is there?

Every resident of the UK under 75 will qualify for a basic rate 20% tax relief. This tax relief applies to pension contributions. Most UK residents can then add whichever is greatest out of the amount they earn, or £3,600. They will receive tax relief on this amount. As an extra boost, there is also an annual allowance of £40,000. The contribution itself includes both the money that you’ve paid in combined with the government’s additional tax relief. Automatic base-rate tax relief is applied to this as your SIPP provider will pull it into the pot.

There additional variations for higher tax rate taxpayers. as always it’s worth Consulting a qualified financial advisor as there are many different factors to consider when looking at tax rules and circumstances.

Should I transfer my pension into a SIPP?

  • The charges and fees associated with your pension will have a large effect on your retirement fund. For example, if you’re married and wish to divorce the cost of pension sharing levied by some schemes is astronomical. Ultimately, most SIPPs have lessening fees and “locking in” costs. They have more flexibility due to the nature of the open market investment options. For example, transferring to a SIPP gives access to tracker funds and ETFs, often much cheaper and more lucrative than standard pension options.
  • If you’re with an older pension provider, or have multiple pensions, there can be numerous fees and charges to switch to a SIPP, This is why you will need to thoroughly way up pros and cons of what “value” will be lost in the process of switching to a SIPP.
  • A SIPP gives you the flexibility to change your retirement plans and pace things how you wish. After age 55, pension you can convert your SIPP to drawdown. Doing this will generate taxable lump sums as an additional income. You can, at 55, withdraw 25% tax-free from the fund leaving the rest in situ.
  • A SIPP is generally good for dependents and beneficiaries. If you keel over before you reach the age of 75, your SIPP investment will pass on to them tax-free.
Pension Bee SIPP
Image Credit: PensionBee is a great SIPP provider with excellent UI and feedback.

What are the main reasons to invest in a SIPP?

  1. The ability to access a wider market of funds, trusts and other types of asset.
  2. Direct investment options with flexible options that is free of tie-ins
  3. Managed via online interfaces resulting cheaper overhead passed on to the investor.
  4. SIPPs are more lucrative to those with smaller pension pots and multiple pensions needing to be combined into one management interface.

How does a SIPP differ from tradition work pensions?

  1. Thousands of investment funds and options, making pensions flexible and interesting
  2. The ability to invest in UK and overseas market
  3. Bonds, ETFs and growing market investment trusts are all options open to investors
  4. Encourages modern money management of pensions meaning you get to know your pension inside out.

Is a SIPP risky?

A SIPP is riskier than a traditional pension in so much as the investment options can be high risk versus high reward. That being said you can still choose to invest in the more stable, safer funds. Ultimately the main factor in the risk level of your SIPP is you and your choices.

Generally there are still charges you should be aware of and compare, even if you chose a low cost, low risk option:

  1. Set up fees for a SIPP can add to the initial loss of assets. They vary from nothing to a few hundred pounds.
  2. Repeated charges, such as annual fees for the maintenance and management of your assets need to be factored in. Particularly important where providers take annual payments ahead of time.
  3. Transaction charges – some funds and assets, i.e. shares, incur transaction duty even thought earnings from them are tax-free.
  4. Experience, or lack of it. Read widely, especially on ETFs as options. once you think you know what you’re doing, read even more and consult a financial advisor.
  5. Exit fees from exiting pot providers may hinder initial growth.


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