A self-invested personal pension, commonly referred to as a SIPP, is a type of person pension that can be very useful for people who want to take more control over their retirement savings. They have become especially popular since the introduction of the pensions freedoms in April 2015 which, amongst other features, facilitate ad-hoc withdrawals from the pension once the policyholder attains age 55.
Unlike defined benefit pensions which are run by a pension scheme that is engaged by an employer, or a personal pension run by a life assurance company, which have investment managers within those institutions, a SIPP, as its name suggests, is a pension which gives the investor control over how the money is invested. It is possible to invest in a wide range of assets including:
- quoted UK and overseas stocks and shares
- unlisted shares
- collective investments (such as OEICs and unit trusts)
- investment trusts
- Structured products
- commercial property and land (but not residential property)
- insurance bonds.
A SIPP can also borrow money, for example by way of a mortgage, to help purchase commercial property. Such properties would normally then be rented out and the rental income, received by the SIPP can be used towards servicing the mortgage repayments with the balance staying in the SIPP. This is common for business owners who may want to buy a property for their business using their pension fund, not least because the rent paid by the business can help grow their pension(s). It is however, very important to consider the worst-case implications of such an arrangement before proceeding. If the unthinkable happens and the business fails, the pension will not be completely protected from the fall-out.
It is important to appreciate that not all SIPPs are the same. Some only allow investment in a restricted range of allowable investments but the fees for such arrangements are, as a result, much lower. Obviously, there is no point paying high charges for a SIPP that allows you to hold commercial property if you are never going to use that facility
Another reason SIPPs are popular is because they are flexible and portable. In circumstances such as changing jobs, or if someone stops working, they can continue contributing to their scheme. Employers can also contribute into their employees’ SIPPs.
Whatever the arrangement, thought should always be given to what happens on the death of the policyholder. The flexibility afforded by a SIPP can be very useful in passing on wealth to future generations. However, with all of this flexibility comes responsibility either for the policyholder or their advisors not least, because the arrangement requires monitoring and the investments will need managing within an acceptable risk framework.
A SIPP may not be right for you. Many of the benefits are achievable through a more basic Personal Pension arrangement which may come at a lower cost and with simplified administration. But for those with larger pensions savings, specific investment objectives or who want ultimate flexibility in terms of capital and income withdrawals, a SIPP could be significantly advantageous. Selecting the most appropriate one for you is not a decision to take lightly. There are many variables and nuances and a wrong decision could prove costly.