A self-invested personal pension (SIPP) is a DIY pension in that you can invest almost anywhere you like and choose your own investments. However, you will need to understand investing, must carry out research and you must be comfortable managing your own investment portfolio and choosing your own investments.
Like other pensions the SIPP is protected from the tax man, this means for example a basic rate taxpayer paying 20% invests £100 It only costs £80 and when you come to take your money anytime from age 55 you will be able to take 25% tax free and the rest will be taxed as income.
The experts advise that if you're new to the investment game, it's a good idea to buy share-based funds rather than individual shares - this will reduce your risk exposure if an individual company fails. To reduce your risk even further, buy a range of different funds.
Investments which can be held in a SIPP include:
- Unit trusts and Open Ended Investment Companies (OEICs)
- Exchange traded funds (ETF)
- Investment trusts
- Gilts and corporate bonds
- Commercial property
How much can be paid into a SIPP each year?
You can contribute 100% of your annual earnings before tax up to a limit of £40,000 for 2017/18. If you earn more than £150,000, the amount you can contribute is gradually reduced at a rate of £1 for every £2 earned over £150,000, until the tax-free limit hits £10,000.
You can contribute up to £3,600 per tax year and still get basic-rate tax relief. So, non-workers can pay in £2,880 per tax year, to which the taxman will add £720. In addition to your annual allowance, there's also what's known as a 'growth time allowance' - this is the amount you can save tax-free into your pension in your lifetime. It's currently £1,000,030.
You can start a SIPP from scratch or transfer money in.
You can either start your SIPP from scratch with money that hasn't been held in a pension, or you can move it from an existing pension.
- New contributions
If you don't have a pension already and decide you want to start investing in a SIPP, you can open one either by making monthly contributions, or if you have a big lump sum you can invest that.
- Transfers from other pensions
If you already have a few pension pots, you can consolidate them all into a SIPP so they're in one place (or just one or two if you wish). Or, if you're not happy with your current pension plan, this could be an option.
If you do this, make sure you check there aren't any penalties for leaving your existing pension and that it'll actually be beneficial.
Bear in mind that unless you've opted out, or are self-employed, you already will have or will soon have a personal pension thanks to the new pension auto enrolment rules. Here, your employer contributes to your pension as well, so this should be your first option if it's a choice between the two.
When can you take money out of a SIPP?
There used to be restrictions to how you could take your pension money, but since April 2015, you can take money from your pension from age 55 when you want, how you want.
For a lot of people, gaining access to their pension at age 55 will be too early, so you can just keep it in your pension until you need it. Some people however will want to take all their pension money at once. If you do this, the first 25% will be a tax-free lump sum and you'll get charged tax on the rest as if it were income.
Other options include:
- Leave it invested in your pension for when you need it
- Take 25% tax free, then buy a flexible income drawdown product
- Take 25% tax free, then buy an annuity
Can a SIPP be inherited?
If you die before taking any money out of your pension, it'll be passed on tax-free to any beneficiaries. But there are a few caveats:
If you die before age 75
Your beneficiaries can take the whole pension fund as a lump sum tax-free. Dependants (but not other beneficiaries) can also choose drawdown or to buy an annuity to take an income tax-free.
If you die after age 75
Your beneficiaries have three options:
- Take the whole fund as cash in one go: If they choose this, the pension fund will be subject to their income tax rate at the time.
- Take a regular income: If they chose this through income drawdown or an annuity (option available only to dependents), the income will be subject to income tax at their income tax rate at the time.
- Take periodical lump sums: If they choose this, the lump-sum payments will be treated as income, so subject to income tax at their income tax rate at the time.
Make sure your SIPP isn't being eaten away by charges
SIPP charges change from provider to provider and some can be expensive. You need to think about what sort of investor you're going to be so you don't get stung.
Take a moment to think about the investments you'll hold, how much they'll be worth and how often you'll change them, before working out which provider will be cheapest for you.
Charges going in vs charges on the way out
You need to look at how much the SIPP will cost you while you're putting money into it, and then how much the platform will charge you when you want to get access to your money again.
There's no point having a really cheap platform for your money on the way in, which costs you the earth when you come to take it out. However, like with a lot of things, how much this will impact you will depend on how much money you're investing and for how long.
The main charges you need to keep an eye out for are:
- Annual administration charge
Also sometimes referred to as the 'platform fee', this is a charge for having the SIPP wrapper. It can be either a flat fee, for example £80/yr, or a percentage - which is usually tiered in accordance to your investment - for example, 0.30%. Some platforms don't charge anything for this.
- Annual charges for funds and shares
Some platforms have an annual charge for funds and shares. This can either be a percentage, for example 0.45%, or a flat fee - for example, £80/yr. Sometimes the flat fee can go towards your trades. You'll often find the platforms that charge a percentage fee here, don't also have an annual administration charge. Yet some platforms charge an annual fee for investing in funds and shares, as well as a charge every time you trade. So if you know you're going to be an active trader, you want to look for a platform with the lowest annual and trading charges.
- Dealing charges
Each time you buy and sell an investment you pay a fee. This can be up to £12.50 per trade. Some platforms will charge you for shares, but not for funds.
- Exit/transfer fees
If you're moving money into a SIPP from another pension or shares you may be charged (and if you move it elsewhere). This can cost around £50.
- Income drawdown charges
When it comes to taking the money, if you want to start drawdown on your SIPP, you'll have to pay a charge. This can cost anything up to £300 for the initial set-up, then up to £150 a year in ongoing charges.
Are SIPPs safe?
Usually with SIPPs, the broker you buy it through, eg, Hargreaves Lansdown, doesn't hold any of the cash; it simply acts as a conduit for you to put the money into whatever funds or investments you want. Therefore, in the unlikely event it went bust, your money should be OK, and still held by the fund manager or bank it resides with. The protection applies should any of those go into default.
If the operator of a fund, trust or other investment vehicle you've put money into goes bust, you're eligible to get your money back, up to a maximum of £50,000.
If you decide to hold the money as cash within the SIPP, you're then normally covered under the standard £85,000 cover per person, per institution rule, the same as normal savings. Ask your individual SIPP provider which bank the cash is held in (often it spreads it around up to five). Then check whether any other savings you may have are in institutions linked to those used for the SIPP cash, as cumulatively you'll only get up to £85,000 protection in each.
If you put money in stocks and shares or funds that invest in them, then you've got a risk-based investment, NOT savings, and a totally different FSCS protection applies. Critically, FSCS protection for SIPPs is very complex - so this is just a general guide, always check with your provider. It's very important to understand that any protection only applies if you lose money because the investment's product provider goes bust - in this case the fund manager that you've bought into through the SIPP.
If the underlying investment goes bust, for example, if you have shares in a company and it goes kaput, or you've bought a fund and it performs poorly, then you've no protection as that's the nature of investing.
For more information on Self-invested Personal Pension (SIPP), please contact us.