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What is a SIPP

Guide to Self Invested Personal Pensions (SIPPs)

If you like the idea of bringing together all of your various pension savings in one low-cost, tax-efficient wrapper that you can manage yourself from a single screen and which can include the broadest range of investment funds, individual share holdings, property assets and more esoteric investments, then a self-invested personal pension (SIPP) is exactly what you’re looking for.

A SIPP is the name given to a personal pension scheme, which allows individuals to make their own investment decisions from the full range of investments approved by HMRC.

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Top 5 reasons to choose a self-invested personal pension (SIPP)

1)  Investment freedom

Unlike a typical personal pension, with a SIPP your investment choices aren’t restricted to the list of preferred, often in-house, funds offered by your pension provider.

2)  Diversification

With most good SIPP offerings you can pick and choose from a galaxy of professionally managed funds covering every aspect of modern investment markets.

You can also choose to hold investments such as shares, commercial property or more esoteric investments (subject to certain rules).

3)  Competitive charges

Because there’s a high level of competition between SIPP providers these days, the charges they impose are generally very low.

The exact amount you might pay each year will depend on how often you trade or use the other services offered by your SIPP provider but, in general, a SIPP is unlikely to cost any more in annual charges than a stakeholder pension (where costs are limited by government legislation).

In most cases, a modern SIPP is likely to cost far less in annual charges than a collection of ‘old-style’ personal pensions that are run by insurance companies.

why choose a SIPP

4)  Creating one, easy to manage pension portfolio

More than anything else, a SIPP presents the opportunity to bring together what may be a disparate collection of pension and retirement savings contracts that you’ve amassed over the years.

Moving your pension savings to a SIPP can transform them into a single, tax-efficient, low-cost portfolio that can be managed from a single screen in line with your personal risk tolerances.

5)  The chance to outperform

Pooling all of your existing pensions into one well diversified, low-cost portfolio that can access the best funds in the market greatly increases the likelihood that your pension savings will deliver better performance than if they remain locked in a selection of ‘old style’ personal pensions.

 

What is a SIPP?

The abiding rule with any investment is to never buy something you don’t understand. So here’s what you need to know before taking the plunge with a SIPP…

A SIPP is essentially a ‘DIY’ personal pension. Like any sort of pension, you can make regular contributions into the plan throughout your life and the ‘pension pot’ you build up is used to provide you with an income or lump sums in retirement.

SIPP or a Personal Pension?

In reality, the differences between a SIPP and a more traditional type of pension are relatively small. Technically, a SIPP puts you behind the steering wheel. You must decide where and how much to invest and ensure that you’re contributing enough to meet your financial ambitions down the road.

Sipp or personal pension

But this is no different to a personal pension or a defined contribution company scheme although there may be default investment options offered for those who are unwilling or unable to select their own funds.

Reclaiming higher-rate tax relief for your SIPP

Apart from having to reclaim higher-rate tax relief from HMRC, there’s little effective difference between a SIPP and a personal pension. Both types of pension prevent you from accessing the funds they contain until you reach age 55.

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What can a SIPP invest in?

SIPPs typically offer a far wider range of investment funds from which to choose than the average personal pension – often with more competitive charges due to the investment platforms operated by SIPP providers.

Neil Adams
Head of Pension Planning at Drewberry Wealth

Self invested personal pensions can also include a far wider range of investments than a personal pension. The investments that can be held in a SIPP include:

  • Stocks and shares from the UK and overseas markets as well as unlisted shares (although you’ll pay stamp duty on these purchases along with your SIPP provider’s own dealing charges);
  • Collective investments such as OEICs, unit and investment trusts;
  • UK government bonds, treasury bills and depositary receipts;
  • Commercial property such as offices or retail units. If you’re a business owner, you can even use your SIPP to buy your work premises with the rent going directly back into your pension. SIPPs can also be used to raise a mortgage to part-fund the purchase of a property, the rental income from which is then used to service the mortgage and any other property costs.
  • Real estate investment trusts (REITs) listed on any stock exchange;
  • Exchange-traded funds (ETFs) listed on any HMRC recognised stock exchange;
  • Commodities that are traded on any HMRC recognised stock exchange;
  • Structured products;
  • Other collective investment schemes and derivatives listed on any stock exchange including fixed-interest securities and loan notes;
  • Unregulated collective investment schemes;
  • Bank deposit accounts;
  • Certain National Savings & Investments products; and
  • Cash.
 

What investments can’t be held in a SIPP?

There are a few things in which a self invested personal pension (SIPP) can’t invest. These include:

  • Investments in residential property including buy-to-lets;
  • Art, fine wines and vintage cars, or any other ‘tangible’ assets are also excluded.

Remember: Some SIPP providers offer ready-made SIPP portfolios if you’re uncomfortable picking your own investments. That said, it’s a good idea get advice if you want to be certain you’re choosing investments that are suited to your individual needs.

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The two main types of SIPP

There are two main types of SIPP from which to choose:

Full SIPPs

These offer the widest choice of investments usually in return for higher charges. They’re more likely to suit more sophisticated investors.

Low-cost SIPPs

As their name suggests, low-cost SIPPs have lower charges than full SIPPs, but they won’t offer access to the same breadth of investments that will be offered by a full SIPP.

Low-cost SIPPs are usually ‘execution-only’. This means that you tell the provider where you want to invest and they follow your instructions. You won’t receive any advice.

 

What is the best SIPP?

A good SIPP provider will also enable you to access your portfolio online, to use the numerous portfolio and valuation tools that SIPP providers have developed for their clients and to trade with just a few clicks of your mouse.

All this means that SIPPs have a particular appeal for those who are comfortable in researching and managing their own portfolio and who may already have accumulated a number of different pension contracts that would benefit from being run as a single, low-cost portfolio.

 

Who can open a SIPP?

Anyone under the age of 75 can pay into a SIPP and you don’t have to be earning to own one.

Even low or non-earners will receive 20% tax relief on any contributions they make up to the statutory maximum contribution of £3,600 gross a year.

Opening a junior SIPP

This will require a net payment of £2,880 with the additional £720 per year being provided by HMRC in tax relief.

Opening a Junior SIPP

Parents can also choose to open a Junior SIPP for their children although, like all SIPPs and personal pensions, they won’t be able to access the money until they reach age 55.

 

Can I Transfer into a SIPP?

One of the chief attractions of a SIPP is the opportunity it offers to consolidate existing plans under the same roof.

Penalties when transferring a SIPP

If you’re planning on transferring an existing pension into a SIPP, first find out whether there will be any penalties imposed by your current provider for switching (and whether your intended SIPP provider offers any compensation towards the cost of such charges).

There’s also the risk that you could be giving up valuable guarantees by moving your pension. As always, if you have any doubts, seek professional financial advice.

Remember: If you have a ‘protected-rights pension’ – a type of pension you will have built up if you were ‘contracted out’ of the state second pension, this can also be transferred into a SIPP.

 

What’s the minimum investment for a SIPP?

This will depend on the SIPP provider in question and the type of SIPP you’re contemplating.

Some low-cost SIPPS will accept monthly contributions as low as £25 or lump sum payments starting from as little as £100.

If you’re transferring existing pensions into a SIPP, then these will usually need to have a combined value of £1,000 or more, although some providers will require higher amounts of £5,000 or more.

If you’re considering a full SIPP, then a good general rule is that the wider the choice of investments available, the greater the level of minimum investment that’s likely to be required. Often, you’ll need to have at least £50,000 to invest.

The typical amount invested in full SIPPs is generally between £150,000 and £450,000.

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Tax relief on contributions

Like any other type of pension, when you pay money into a SIPP, you get tax relief on your contributions.

So, if you make a £1,000 gross pension contribution into your SIPP, it will cost you just £600 if you’re a higher-rate taxpayer, or £500 if you’re a top-rate taxpayer. If you’re a basic rate taxpayer, it will cost you £800.

Basic rate tax relief is added by your SIPP provider, but if you’re a higher or additional-rate taxpayer, you’ll have to claim back any extra tax relief to which you’re entitled through a self-assessment tax return.

neiladamsportraitround

“Although you can pay as much as you want into your SIPP, there are limits on the amount of tax relief you can receive.

“There are three main limits of which you need to stay aware when it comes to pension tax relief: the earnings limit; the annual allowance; and the lifetime allowance.

Neil Adams
Head of Pension Planning at Drewberry Wealth

 

SIPP Contribution Limits

The three main limits you need to know about when it comes to pension tax relief are:

 

The Annual Earnings Limit

This means you can only receive tax relief on contributions up to the amount you earn. So, if you earn £35,000 a year and have £15,000 in savings, and you pay £50,000 into your pension, you’ll only receive tax relief on the first £35,000, as these are your annual earnings.

Remember: Non-earners can still fund SIPPs. If you’re a non-earner, you can make a gross contribution of up to £3,600 each tax year to a SIPP and receive basic-rate tax relief.

This means that if you paid in £2,880 in a tax year, HMRC would contribute £720.

 

Pension Annual Allowance

The maximum you can pay into your SIPP and receive tax relief upon is £40,000. Pay in any more than this and you won’t get tax relief on these contributions.

However, if you have any unused allowance from previous years, you can carry these forward from the previous three tax years after you’ve contributed the maximum for this tax year.

Remember: You’ll only receive tax relief on total contributions that don’t exceed your earnings in the tax year that you pay them and you’ll only receive higher-rate tax relief to the extent that you’ve paid it.

* Any unused annual allowance for 2015/16 must be based on the contributions paid in the ‘post-alignment tax year’, 9 July 2015 to 5 April 2016.

To calculator your own pension annual allowance and carry forward entitlement please try our pension annual allowance calculator →

tapered pension annual allowance for higher earners

The reducing annual allowance for high earners

To further reduce the cost of pension tax relief to the state, the government introduced a tapered annual allowance for higher earners in April 2015.

Since then, if your income, pension contributions and employer contributions are cumulatively worth more than £150,000 a year, you’ll have seen your annual allowance progressively reduced.

Tax relief is reduced at the rate of £1 for every £2 of total income over £150,000. This means that if your total income is £210,000, you’ll only benefit from tax relief on annual contributions of £10,000.

The limit only applies to those with annual income excluding pension contributions (referred to as ‘threshold income’) of more than £110,000.

Pension Lifetime Allowance

The Lifetime Allowance

The concept of the lifetime allowance for pension savings was only introduced in 2006. At the time, it was set at a level of £1.5m. It then increased every year until it reached a generous £1.8 million in 2010. Since then, it’s been steadily whittled down again.

It hit £1.25m in the 2015/16 tax year and was cut to just £1m in the 2016/17 tax.

However, from April 2018, the lifetime allowance will rise in line with the Consumer Price Index (CPI).

If you’ve been fortunate enough to build up this amount in pension savings, two things will happen:

  • You won’t be entitled to tax relief on any contributions you make over and above this limit;
  • Any pension savings you’ve accrued above the lifetime allowance will be subject to the lifetime allowance charge of 55% on any lump sums taken and 25% on benefits taken as income (this is in addition to paying income tax on such benefits at your highest marginal rate).

Protecting your pension lifetime allowance

Since the lifetime allowance was introduced in 2006, and whenever it has been revised down since, HMRC has allowed pension savers to apply for protection against a potential lifetime allowance charge.

Securing lifetime allowance protection in this way increases your lifetime allowance.

You can still apply for protection against the 2014 reduction in the lifetime allowance from £1.5m to £1.25m, if your pension savings were above £1.25m on April 5, 2014. This allows you to set your allowance at the value of your pensions at 5 April 2014, up to a maximum of £1.5 million, and to continue making contributions.

You can apply for this protection on the HMRC website until 5 April 2017.

protecting your pension lifetime allowance

Individual or fixed protection?

Alternatively, you could apply for either Fixed Protection 2016 or Individual Protection 2016. Both enable you to fix your allowance at £1.25m.

Fixed protection will apply if no further pension benefits are accrued after 5 April 2016 (this includes personal and employer contributions as well as contributions to a final salary scheme).

Individual protection 2016 fixes your allowance at the value of your pensions as of 5 April 2016, up to a maximum of £1.25 million and enables you to continue making and receiving contributions.

To qualify, your pensions must have exceeded £1m at 5 April 2016.

What age can I take my sipp?

When can I take money out of my SIPP?

The pension freedoms that were introduced in April 2015 granted far greater flexibility over how and when Britons can access their SIPPs and other pension savings.

Once you reach the age of 55, you can take money out of your SIPP whenever you want to. If you decide to take all your money out of your SIPP, then the first 25% of your savings will be tax-free, but you’ll have to pay tax on the remainder as if it were income.

Making use of flexi-access drawdown

If you want to make regular withdrawals from your SIPP, then you should think about flexi-access drawdown. This allows you to take the 25% tax-free and to then draw income as and when you need it. Again, you will be taxed on these withdrawals.

Alternatively, you might decide that you want to keep your pension invested and to draw an income from it. If you choose this route, 25% of each withdrawal will be tax-free, and the remainder taxed at your current rate.

 

How much will my SIPP be worth?

A SIPP is a money purchase (or defined contribution) scheme like any other. This means that the value of your pension pot at retirement depends on how much you managed to contribute and how well your investment choices performed (after charges) over the years.

Remember, when it comes to investment returns there’s no substitute for starting early. The longer that you’re able to contribute to your SIPP the bigger your pension pot will inevitably be.

For example, if you were to start paying £200 a month into a SIPP at age 30, assuming a 7% growth rate each year, your SIPP would be worth £201,124 by the time you reach age 60.

If you waited until age 45 to begin contributions, your SIPP would be worth just £59,215 based on the same rate of growth*.

* Figures provided by Unbiased.co.uk

“Making the most of your retirement planning options isn’t easy. With the advent of the pensions freedoms SIPPs have become one of the most useful pension arrangements available for millions of Britons.

“But they’re a complex and long-term undertaking. So don’t make the mistake of trying to go it alone.”

Neil Adams
Head of Pension Planning at Drewberry Wealth

 

What happens to my SIPP when I die?

If you die before you reach the age of 75, you’ll be able to pass your pension on to your loved ones as a lump sum without them being hit by a big tax bill.

If you die after the age of 75, you can still pass your pension on, but your beneficiaries will have to pay income tax at their marginal rate on any income they receive from it.

If they choose to take your SIPP investments as a lump sum, the cash will be subject to tax at 45%.

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What do SIPPs charge?

Fees to set up a SIPP vary widely depending on the provider. Charges will naturally be lower if you opt for a low-cost SIPP where you’re in total control and make all the investment decisions yourself.

A full SIPP, which can include investment advice and access to a wider choice of investments, will cost more.

Whatever kind of SIPP you select, there’ll typically be a set-up fee and an annual management fee. Some providers don’t impose the latter, but they aim to recoup this through other charges.

 

Annual management fees on SIPPs

Some annual management fees will be based on a percentage of your pension pot, whereas others impose fixed fees.

As a general rule, percentage-based fees tend to be more cost effective for smaller pension pots whereas fixed-fee SIPPs will be more economical for larger pension pots.

Be sure to compare dealing charges on any SIPP and to form a view on just how often you expect to trade.

If you’re moving an existing pension into a SIPP, your pension provider may impose transfer fees (although some SIPP providers will offer compensation toward such costs).

SIPP Transfer Advice

Need help starting or managing your SIPP?

At Drewberry Wealth we’re only ever a phone call away. If you need support or advice or you’d like to talk through how a Drewberry Wealth adviser can help, don’t hesitate to call us on 0208 4327 333.

Alternatively, drop us an email on wealth@drewberry.co.uk and one of our specialist pension advisers will get back to you the same day. Your first conversation with one of our advisers is always free of charge.

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