Aside from being the safest way to drink a hot cup of tea, a SIPP is type of personal pension that allows the holder greater flexibility over how their money is invested.
As is the norm for most financial products, ‘SIPP’ is an acronym, meaning Self-Invested Personal Pension. While personal pensions are generally limited to investments in a range of funds, a SIPP allows holders to invest in a far wider range of assets. This provides greater freedom and flexibility, it also comes with its own unique set of pitfalls to be aware of.
So how exactly does a SIPP work? And who are they potentially right for?
What exactly is a SIPP?
To the untrained eye, it looks very similar to a personal pension. Money is contributed on a regular or ad-hoc basis and built up for use in retirement.
Like a personal pension, the money can’t be accessed until the holder is 55, unless the holder is in very poor health. The contribution allowance is the same, and the maximum that can be paid in
whilst still receiving tax relief, is the higher of:
- Your salary
The key difference: SIPPs and Personal Pensions
The biggest difference between a SIPP and a personal pension happens behind the scenes. The list of assets that a SIPP can invest in includes:
- Individual shares
- Bonds, trusts and other investments
- Commercial property
- Deposit accounts
Who is a SIPP potentially right for?
- People who want more control of their investments or who want to invest in a wider range of assets
- People who want to invest in deposit accounts
- Business owners who want to put commercial properties in their pension for their business to trade from
- Investors who want to buy commercial property and rent it out to business tenants
What are the pitfalls of using a SIPP?
No financial product is right for everyone, all the time. A SIPP is no different and has several potential disadvantages, which include:
- Charges: SIPPs are potentially more expensive than other types of pension, which means that those investors not using the wider investment powers could be paying for functionality they aren’t using or need
- Risk: The greater investment flexibility available with a SIPP may tempt some people to hold assets which are inappropriate for their circumstances or attitude to risk
- Commercial property: Many people with a SIPP will invest in commercial property, either for their own business to use or to be sub-let to a tenant. While not specifically a disadvantage of a SIPP, investing in commercial property brings its own set of risks, which need to be carefully managed
- Ongoing management: The assets held in a SIPP may require more frequent ongoing management than other alternatives, such as funds in a Personal Pension. This will take additional resource; either fees to an adviser, or your time if you are managing the SIPP yourself
We are here to help.
For more information about pensions; self-invested or otherwise, don’t hesitate to get in touch using the phone number at the top of the page.