What is a SIPP?
SIPPs – or Self-Invested Personal Pensions – are essentially Do-It-Yourself, as you make the decisions as to where you want to invest your money. An inexpensive SIPP is easy and straightforward.
A SIPP is like a folder that contains your investments and allows you to gain from tax breaks. An investment OK’ed by HMRC can be put into the SIPP folder and a full SIPP includes surprising perks such investing in intellectual property or a commercial property (although not residential property).
Why choose a self invested personal pension (SIPP)?
If the steep charges of a personal pension put you off, a SIPP may be right for you, as it is a tax-efficient and flexible choice. By controlling your own pension pot, you can help increase your returns and cut down your costs.
If you are weary of those unintelligible and depressing pension statements, a SIPP is a breath of fresh air as you can check out how your investments are doing online, at any time you want. However, you do have to be prepared to do your homework to enable you to manage your investments.
You can make regular payments or alternatively pay in a lump sum, whilst receiving the tax benefits associated with a traditional personal pension. You will receive 20% basic tax relief on your payments and if you are a higher rate taxpayer, you can claim an additional 20% or 25% via your self assessment tax return.
You can invest up to £40,000 per year, in line with the specified ‘annual allowance’.
Once you reach the age of 55, you can choose to take up to 25% of your total pension fund as a tax-free lump sum payment.
If you have an existing pension fund, you may be able to transfer it to a self invested personal pension.
SIPPS are also transparent in terms of charges and there is no miniscule small print to easily miss, or confusing terms and conditions.
Are there any risks associated with a self invested personal pension?
You can take a gung-ho approach and invest high risk with the aim of a high return. This provides opportunity to make some substantial profits. However, the bottom line is that the value of your investments can decrease as well as increase, so you cannot determine the value of your final pension fund.
The overall tax efficiency of a SIPP will depend on your own tax band.
If you choose a SIPP as your pension fund, you will be unable to access the funds until you are aged at least 55.