How does a pension (SIPP) work? // April 26, 2018

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What is a SIPP?

SIPP stands for self-invested personal pension and it works similarly to standard pensions in the UK, however, it differs in one particular way: it provides you with much more flexibility in terms of the investment you choose and how you manage them, unlike the pooled fund was chosen for you via standard pension schemes. We explore everything you need to know about the SIPP scheme.

How does SIPP work?

SIPPs allow people to have more autonomy over their investments. It gives people the opportunity to manage their own pension fund, enabling them to switch investment if they want to, and manage them accordingly. This is often referred to as an ‘execution only’ account, which refers to the fact you are not taking advice from the company where you hold a SIPP account. It is also possible for people to pay to have an authorised investment manager who can deal with your SIPP account on your behalf.

 

What can I invest in with SIPP?

There are a number of assets you can choose to invest in with a SIPP fund, such as:

  • Certain National Savings and Investment products
  • Insurance company funds
  • Investment trusts and companies that are recognised by the Financial Conduct Authority
  • Offshore funds
  • Commercial property (for example, shops, factory premises, offices)
  • Deposit accounts with building societies and banks
  • Unit trusts
  • Government securities
  • Individual stocks and shares
  • Traded endowment policies

However, it is important to note that the above isn’t an exhaustive list in terms of all the different investment options available with SIPP accounts. Depending on the provider you choose to open a SIPP account with, such as interest.me, will determine the exact options you will have in terms of investment.

How much do SIPPs cost?

Generally speaking, SIPPs tend to have higher charges than a typical pension or stakeholder pension. As a result, SIPPs tend to be popular with those who have both considerable experiences in investing as well as having a larger fund overall to counteract the costs.

However,  certain SIPPs can start for as little as £50 a month, but the exact amount you pay will be determined by the array of investments you have. For example, you will need to have a higher minimum level of investment the more diverse your investments are. It is possible to add money to your SIPP with a lump sum, but this is capped in the UK at £40,000.

The kind of fees you will need to take into account include:

  • Set up fees: this depends on the provider in question, it can be free or anything up to £500
  • Annual charges: usually a percentage up to 0.75% or a flat fee paid out yearly
  • Fund fees up to around 1.5%
  • Exit fees

How can you access money in your SIPP?

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Legislation brought in in 2015 has made it easier to get money out of a SIPP.

As a result of legislation brought in by the government in April 2015, people who have SIPP accounts now have more flexibility with their funds from the age of 55, allowing you to access your pension pot more freely. It is possible to take the pension money all at once if you wish to. If you do decide to, you will receive some tax relief: the first 25% of the SIPP funds will be a tax-free lump sum. Any additional money you take from a SIPP will be taxed as income.

Who are SIPPs suitable for?

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There are a number of things you need to take into account before opening a SIPP account.

  • People who know they will be making significant pension contributions to their pension pot due to having a larger amount of savings
  • For those who would like the option of being able to consolidate all their pensions in one place
  • If you want to still have money invested once you retired
  • For those who have a financial adviser who makes the decisions on their behalf
  • If you have experience in investing: this is because some SIPP investment can have a degree of volatility and therefore risk involved. As a result, if you make the wrong investment choices in your portfolio, it is entirely your responsibility.

If you are unsure as to whether having a SIPP account is the right option for you, it is worth using the Pension Wise service, which is a free and government-backed service that provides advice and guidance on your retirement income options.

Tax relief options for SIPP account

As with all pension schemes across the UK, It is possible to qualify for up to 45% tax relief on all money invested into a SIPP, this is up to £40,000 in the UK.

SIPPS can also provide tax relief on commercial premises which could make opening up an account a particularly appealing choice if you own property of this kind. There is the option of ‘selling’  your premises to SIPP before the funds are used to re-invest. It is also possible to benefit from inheritance tax advantages through SIPPs.

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