What Is A SIPP? Should You Be Using One?

It’s not hard to see why people are put off by pensions, you just have to look at the different types: Personal Pension, Stakeholder Pension, Self-Invested Personal Pension, NEST, Auto Enrolment, Final Salary pension, Defined Benefit Pension, Defined Contribution pension, the list and confusion goes on and on.

Most people know that a pension is a way of providing an income in retirement, however less is known about one very popular option, namely a Self-Invested Personal Pension, or SIPP for short. Approaching one million people are now ploughing money into SIPPs to help make ends meet in retirement. But just what is a SIPP?

More importantly, is it the right option for you?

First things first, what is a SIPP?
In a nutshell a SIPP is a type of Personal Pension but with wider powers of investment.

In common with a Personal Pension all contributions get tax relief, for every £800 paid in by a basic rate tax payer £1,000 is credited to the scheme. The money in a pension is locked away until 55, at the earliest, when up to 25% of the fund can be taken as a lump sum with the balance providing an income for the rest of your life and also to your dependents.

How is a SIPP different to a Personal Pension?
The main rules in terms of contribution levels, tax relief and how you access the money are the same; the main difference lies in what you can invest in. The investments within a Personal Pension are generally restricted to buying funds; however a SIPP has far wider investment powers.

Some of the most common types of investment held within a SIPP include deposit accounts, directly held shares, and commercial property as well as funds. Other allowable SIPP investments include gold, ETFs, corporate bonds, gilts and more unusual assets including land, woodland, biofuel, and commodities. Investors should be aware though that the more unusual and esoteric the investment, the more risky it will be.

Charges are also another point of difference. Most Personal Pensions charge a percentage of the amount invested, SIPPs are different, with most having fixed fees, which often work out cheaper than percentage based fees, especially for larger pension funds.

Is a SIPP right for me?
That’s hard, even impossible to say, without knowing more about your circumstances, however as a general rule of thumb, SIPPs should be considered if:

  • You want to invest in a wider range of assets that is available via a Personal Pension. For example you want to buy commercial property, shares or invest in deposit accounts
  • You have a large fund and would be better off paying a fixed fee rather than a percentage
  • You want to manage the investments yourself. Most SIPPs have online functionality, allowing you to buy and sell assets, typically shares, funds and ETFs, whereas this is not generally possible with Personal Pensions
  • You want to access your pension, once you have reached the age of 55, using Flexible Drawdown, which is not always an option with a Personal Pension

The range of pensions available is extensive and often confusing, in some ways SIPPs add to this confusion, but with nearly a million now in existence they cannot be ignored and if you fall into one of the above categories you should at least consider whether they are right for you.

Phillip Bray is a respected writer for Investment Sense, financial advisors in Nottingham who specialise in finding investors the best SIPP for their needs.