What is a self-invested personal pension (SIPP)?
A self-invested personal pension, or SIPP, is a government-approved personal pension scheme that allows the individual to select investments from a wide range of HMRC-approved options. This is in stark contrast to most pension funds, which are typically far more limiting in the choice of investment types.
SIPPs offer individuals up to 45% tax relief on contributions and there is no limit on the number of different pension schemes to which an individual can belong. In addition, investments in a pension can grow free of UK capital gains tax and further UK income tax.
Individuals can receive tax relief on up to £40,000 per annum invested in to a SIPP and there is a lifetime cap of £1.25 million (this will drop to £1 million from 6 April 2016).
The benefits of a SIPP
The main benefits of a self-invested personal pension are:
Generous tax relief on up to £40,000 invested per annum
The ability to begin drawing down on the fund from the age of 55 without having to stop work
Up to 25% of the amount you’ve accumulated in your SIPP(s) can be withdrawn as a tax-free lump sum with any more taxed as income
You can use a SIPP to withdraw regular income (via drawdown or annuity)
The following are the main tax reliefs afforded through a SIPP.
For basic-rate taxpayers (those in the 20% tax bracket): If you’d like to invest £10,000 into your self-invested personal pension plan, the government would contribute 20% of this, or £2,000, automatically. This means that for a gross contribution of £10,000 your net contribution would be £8,000.
For higher-rate taxpayers (those in the 40% tax bracket): If you’d like to invest £10,000 into your self-invested personal pension plan, the government would contribute 20% of this, or £2,000, automatically, and you would be able to claim a further 20% (£2,000) higher-rate tax relief via your tax return. This means that for a gross contribution of £10,000 your net contribution could cost you as little as £6,000.
Note, you must pay sufficient tax at the higher rate to claim the full higher-rate tax relief via your tax return, and you can do what you like with the higher-rate tax you get back.
For additional-rate taxpayer (those in the 45% bracket): If you’d like to invest £10,000 into your self-invested personal pension plan, the government would contribute 20% of this, or £2,000, automatically, and you would be able to claim a further 25% (£2,500) higher/additional-rate tax relief via your tax return. This means that for a gross contribution of £10,000 your net contribution could cost you just £5,500.
Note, you must pay sufficient tax at the additional/higher rate to claim the full higher-rate tax relief via your tax return, and you can do what you like with the higher-rate tax you get back.
Remember, tax rules can change over time and the relief you receive will depend upon your individual circumstances.
The down side of a SIPP
While SIPPs do offer some nice tax relief, there are a couple of key aspects to keep in mind before committing your all to a SIPP.
- The ‘self’ in self-invested personal pension says it all: you are the one responsible for making all of the investment decisions with the money you contribute to your SIPP and therefore any gains or losses will fall squarely on your shoulders. Make a poor decision with your SIPP and you can wave goodbye to much of your pension
- You risk paying two sets of management fees for some investments you put into a SIPP. You will pay for the SIPP’s wrapper and then you may have to pay again for the underlying investment that you put into the SIPP
You might be tempted to transfer a final salary pension into your SIPP, and you can, but it is rarely advisable (unless you want to take a big bet on your retirement income – and that’s not advisable either!).
How to choose the right SIPP
Like most pension options, SIPPs can be customised to match your level of risk appetite starting from the least costly and most ‘self’-controlled options, which usually limit the type of investment that can be made through the SIPP, and progressing up to those where pension advice is included as part of the cost and a much wider range of investment types can be included.
Most low-cost SIPPs will allow you to invest in a wide range of funds, stocks, shares and a few other types of investments. However, these low-cost SIPPs do not allow investors to invest in commercial property or unlisted shares as part of the SIPP. The more expensive SIPPs will allow for these types of investments to be included as the cost of including them in the SIPP is offset by the higher fee.
Ultimately, the decision comes down to what types of investments you would like to have included in your SIPP and how much advice you seek on those investments. Many online providers, such as Hargreaves Lansdowne and St James’ Place, offer a wide selection of options, so have a look around before you decide.
Alternatives to investing in a SIPP
SEIS funds and EIS funds
Only available in the UK, tax-efficient SEIS funds and EIS funds let you invest in a fund of early-stage ventures, similar to a venture capital fund, with the added bonuses of receiving government tax incentives for investing and government loss-relief protection should the companies in which you have invested fail.
Private equity effectively involves making large-scale private investments into unlisted companies in return for an equity stake. In Europe, these include venture capital, buyouts and buy-ins. Private equity funds tend to be formed using funds raised from institutional investors including pension funds, insurance companies, endowments and high-net-worth individuals. The funds raised, along with borrowed money and the private equity firms’ own money, are used to invest in companies believed to have a high growth potential.
Investing in rarities: Antiques, art and wine
While you may see buying art, antiques and wine as more of a pastime than investment, considerable returns can be made if you are astute about your purchasing decisions. Investing in art, for example, has long been considered a rich man’s investment, with paintings routinely bought and sold for hundreds of thousands, or even millions, of pounds. Investing in antiques has seen increased popularity in recent years thanks to shows like the Antiques Road Trip, and investing in wine never really died out.
- How investing in wine can help diversify your portfolio – by Fine Wine Specialist Chrissie McClatchie
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