Thinking about switching to a self-invested personal pension (SIPP)?
Turns out, you’re not alone. Thirty years since their official launch, SIPPs are more popular than ever before – having over two million products in the UK with approximately £180bn invested.
But why have they become such a hit? And is a SIPP the right choice for you?
How SIPPs work
SIPPs are, essentially, do-it-yourself pensions.
They work in a very similar way to a standard pension scheme, but have one main difference; that is, they provide a lot more freedom. Rather than being given a limited selection of investment options – chosen by the company’s fund managers – you get to choose yourself. It’s entirely up to you where your hard-earned money goes and you maintain full control over your savings.
There are currently two main types of self-invested pension available:
These are usually ‘execution only’. That means, the firm simply follows your instructions and doesn’t offer you any advice. It’s your responsibility to do the research and you’re in charge.
Some SIPP providers allow you to start a low-cost SIPP with a very small pension pot, often with a sum as low as £5000. But this isn’t recommended and most will stipulate that you need to have at least £50,000 to transfer, or should be able to contribute several thousand pounds each year.
A full SIPP offers the widest choice of investments. They’re aimed at people with a relatively large pension fund – and, as investments are bigger (and usually much more complex), SIPP providers often have a team of experts on hand, who can help to guide and administer your decisions.
Advantages of a self-invested pension
SIPPs allow you to choose from a much broader range of investments, including:
- Stocks and shares
- Investment trusts
- UK government bonds
- Unit trusts
- Open-ended investment companies (OEICs)
- Gilts and bonds
- Exchange traded funds (ETF)
- Commercial property
This isn’t an exhaustive list. The possibilities are endless and, rather than putting all their eggs in one basket, most people choose to split their money and buy a portfolio of different investments.
Just like standard personal pensions, a SIPP will protect you from the tax man.
You will receive income tax relief on any money paid in, up to the value of your annual salary or a maximum of £40,000. For those on the basic tax rate, this currently stands at 20%. For higher or additional rate taxpayers, you will also be able to claim back the extra tax that you have paid. In addition, income and profits in your SIPP can build-up completely tax-free.
Thanks to the ‘pension freedoms’ reforms introduced in 2015, anyone aged 55 or over can now take money out of their self-invested pension, whenever they want. The first 25% can be taken tax-free. And, if you die before any money is withdrawn, it’ll be passed on tax-free to any beneficiaries.
Disadvantages of a self-invested pension
SIPPs, per se, are not high-risk. They’re just a pension ‘wrapper’ or ‘basket’ to hold investments; somewhere to keep your money until you’re ready to retire. But they can be risky if you don’t understand investments.
Without the right knowledge and experience, many people purchase investments that are non-standard, under-performing and sometimes impossible to sell (illiquid). Therefore, it’s vital that you know your stuff, and you need to be 100% committed to monitoring your funds and making critical decisions.
The charges associated with SIPPs can vary greatly, and some can be very expensive. If your pension funds are quite small, these charges can very quickly eat away at any returns.
Who should consider a SIPP?
Over the last few years, SIPPs have become an increasingly popular option, particularly amongst those who want to consolidate multiple pension pots (from different employers) or wish to have more control over their savings. But, it’s fair to say, they’re certainly not suitable for everyone.
They’re designed primarily for people who have both the time and know-how to choose and look after their investments. If you don’t have these luxuries, a SIPP probably isn’t the right choice for you.
Unfortunately, for this reason, many people have been sold a self-invested pension that isn’t suitable for them and their circumstances. If you think this applies to you – and you have been mis-sold a SIPP – you could be entitled to claim. This can be done in a number of ways. You can apply:
- For free, to the Financial Ombudsman, the Pensions Ombudsman, or the Financial Services Compensation Scheme (FSCS)
- Directly to the person to which your claim relates
- Via your personal insurance for mis-selling if this is something you have
- By using a claims management company, such as Money and Me Claims
As a specialist in this area – authorised and regulated by the Financial Conduct Authority (FRN 834307) – we have detailed knowledge of self-invested personal pensions and SIPP providers. Not only can we advise on your eligibility to claim for a mis-sold SIPP, we can also take care of the entire process on your behalf and will do everything we can to help mitigate any losses incurred.