SIPP Pension Advice

The Pros and Cons of Investing in a SIPP Pension

SIPP pensions have been increasingly popular over the past ten years, as pension holders have become disillusioned with the performance of their existing pension plan.

Many people find it very restricting to be tied in to a pension company’s limited selection of investment funds, you might find the flexibility of a Self Invested Personal Pension (SIPP pension) an attractive proposition. The term is entirely self-explanatory in so far as you remain completely in control of every investment for your pension fund and still enjoy the benefits of the income tax relief that is granted to all pension plans - ie funds you invest is invested before the deduction of tax, so that if you would otherwise have paid the basic rate of 20% tax, every £100 investment is effectively invested for £80.

The pros of a SIPP Pension

Whilst you keep control of the investment decision-making process, you do not need to make all of these decisions on your own. Your SIPP pension can be managed with the help of an independent financial adviser, who will be able to offer all the necessary investment advice and potentially steer you away from rash or unwise investments.

Although you will be paying for the professional management of the fund - by way of commissions that he will take from the investments made - nevertheless the SIPP pension will still cost less than a traditional pension from a pension company.

SIPP pensions were first intended for pension holders with enough capital to maintain a significant pension fund and to pay the fees of an investment manager, but the charges have over the years reduced, so that relatively modest pension funds can be maintained on a SIPP pension basis. The upper limit of pension contributions that can be made into a SIPP is 100% of your salary up to £245,000.

The cons of a SIPP Pension

Ironically, what makes the SIPP pension attractive for pension holders, ie that they are responsible for the investment decision making - is also what makes them dangerous. SIPP pensions are not for the type of investor who knows little about the financial markets, or knows nothing about portfolio diversification, nor indeed anyone who is not at home with doing financial research and making prudent investment decisions.

Although this degree of freedom will be enjoyed by many investors, for other pension holders the range of investments can be daunting. The allowable investments include anything from individual shares to bonds, CFDs, forex, gilts, traded endowment policies, cash or commercial property. However, the government’s original idea to include “exotic” investments such as art, antiques, vintage cars have not been implemented.

Another drawback of a SIPP pension is that the costs of setting up and managing a SIPP pension can be quite high. Set-up costs can be as high as £1,500 and in addition to that, you need to factor in the annual management charge on top of that. In addition, there will be dealing charges to consider, which arise when you buy and sell the investments included in the SIPP pension.

If you get things completely wrong, of course, and end up making poor investment decisions, then the whole of your pension savings are at risk.

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Self Invested Pensions are becoming increasingly popular. To start up a SIPP an individual or their employer needs to approach an approved provider. These are normally insurance companies or fund managers but a comprehensive list is publicly available. You must use one of these providers to take full advantage of the tax benefits. Once a provider has been chosen, the plan holder can then manage the portfolio themselves, or they can appoint a manager to act on their behalf.

One of the key benefits of a Self-Invested Personal Pension is the tax advantages. Like all other personal pension plans, contributions to SIPPs are automatically exempt from basic rate tax. If you are a higher rate payer, you can claim additional relief in your tax returns. Similarly, if you have used your SIPP to invest in assets such as property, the income you receive is tax-free and is not subject to capital gains tax.

As with all pension plans, after retirement, the income that you draw-down will be subject to the usual income tax rates. The money you earn from your investments is also allowed to be reinvested tax-free, up to a threshold £235,000. Reinvesting your income is a great way of growing your pension pot without any upfront costs.

Another key advantage of a SIPP is its flexibility. Unlike other tax-efficient saving schemes, a SIPP gives you the ability to invest in a wide variety of stock market properties so you can potentially access higher rates of return even if rates are low. This will not be perfect for everyone, as SIPPs can be exposed to more risk, but for those who are not attracted to the rates offered by savings accounts and ISAs, SIPPs are a great alternative.

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Saving in a pension such as a SIPP has significant tax benefits. The government will contribute 20% of every gross contribution you pay - meaning a £1,000 investment in your SIPP costs you just £800. If you’re a higher rate tax payer, the tax benefits could be even greater. In the above example you could claim back as much as a further £200 via your tax return if you have sufficient income or gains in the higher rate tax bracket.

Restrictions introduced in the Budget on 22 April 2009 limit the contributions of anyone whose total annual income has reached £150,000 from 07/08 onwards. Download our Budget fact sheet for more details.

When you wish to withdraw the funds from your SIPP, between the ages of 55 and 75 (50 and 75 before April 2010), you can normally take up to 25% of your fund as a tax free lump sum. The remainder is then used to provide you with a taxable income.

Newer styles of pension plans run by insurance companies now tend to offer a limited selection of funds from other fund managers, plus their own in-house funds.

SIPPs offer the widest possible choice of investments for individual pension plans, allowing holders to pick funds from across the market.

A SIPP can hold all the asset classes required to give you the chance to build a diverse investment portfolio that has just the right level of risk you are happy being exposed to. SIPPs are now a real option to cost effective pension planning.

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