It is important that everyone is aware of their pension options as this will have a direct impact on your lifestyle when the time comes for you to retire.
There are many different options and you should always fully research these to find out what is best for you, but one excellent type to consider is a Self-Invested Personal Pension (SIPP).
This is, essentially, a DIY pension which allows the holder to select and manage the investments made.
Pensions were created to help us save for retirement. But most traditional pensions don’t give you the flexibility to invest where you want to. And it’s not always easy to see or understand what’s happening with your money.
Stay In Control
With a traditional personal pensions limit, holders are limited to certain investment choices usually run by the pension provider’s fund managers.
This can be limiting and many people do not like the idea of a pension company deciding how their savings are being invested, but this is not a problem with SIPP which puts you in control and you can invest almost anywhere that you like.
This enables you to know exactly where your money is at all times and how much it will cost.
Who Should Consider SIPP?
Of course, with this approach, there is a lot more responsibility and it will not be suitable for everyone. It is ideal for those that have a strong knowledge of investing and is happy to spend time researching different investment opportunities to see if it is a smart move.
If you were to make a poor decision, you have only yourself to blame and this can be frustrating when dealing with your retirement funds.
SIPPs can also be good for those with a large pension pot, someone looking to consolidate all of their pensions into one place and anyone with a financial adviser.
As with any other type of pension, a SIPP will protect your money from the taxman as you pay the money in before tax is taken off. When you decide to take your money (aged 55+), you can usually take up to 25% tax-free with the rest being taxed as income.
If you pay a higher rate of tax, you’ll usually be able to claim back even more with your tax return. Once it’s in your SIPP, your money can grow free from UK capital gains and UK income tax. The tax benefits will depend on your individual circumstances and tax rules are subject to change.
There will be fees attached to setting up a SIPP and if you need help to cover these then you could look to take out a loan from somewhere like Likely Loans.
You can put different investments in a SIPP
SIPPs provide a massive investment choice. If you’re a first-time investor, don’t get carried away.
You will be able to invest in stocks and shares, investment trusts listed on any stock exchange, UK Government bonds, open-ended investment companies, gilts and bonds, commercial property, offshore funds and more.
Investments which can be held in a SIPP include Unit Trusts and Open Ended Investment Companies (OEICs), Exchange traded funds (ETF), Shares, Investment trusts, Gilts and corporate bonds, Cash, Commercial property.
Unit Trusts and Open Ended Investment Companies (OEICs)
Investment funds and OEICs are the most common type of funds. They are forms of joint investment that allow you to share your money with other people and invest in world exchanges.
They are “open”, which means that there is no limit to the size of the fund, that units are “created” or “destroyed” to meet investor demand.
Exchange Traded Funds (ETFs)
ETFs are traded on the London Stock Exchange or other European markets. A relatively recent addition to the investor’s toolbox, ETFs tracks the value of an index (such as the FTSE 100, or the price of gold) relatively cheaply.
An index is simply a tool that tracks the share price of a number of companies traded on stock markets around the world. For example, the FTSE 100 tracks the 100 largest companies listed on the London Stock Exchange.
You can simply invest cash in your SIPP. Many people will do this if they want to get closer to retirement and limit their risk. However, interest rates are often bad and usually worse than with normal savings accounts. They typically vary from 0.1% to 0.5%.
When can you take money out of a SIPP?
There used to be restrictions on how you could take your pension money, but since April 2015, you can take money from your pension from age 55 when you want, how you want.
For a lot of people, gaining access to their pension at age 55 will be too early, so you can just keep it in your pension until you need it.
Some people, however, will want to take all their pension money at once. If you do this, the first 25% will be a tax-free lump sum and you’ll get charged tax on the rest as if it were income.
Are SIPPS safe?
Usually, with SIPPs, the broker you buy it through doesn’t hold any of the cash; it simply acts as a conduit for you to put the money into whatever funds or investments you want.
Therefore, in the unlikely event, it went bust, your money should be OK and still held by the fund manager or bank it resides with. The protection applies should any of those go into default.
If the operator of a fund, trust or other investment vehicles you’ve put money into goes bust, you’re eligible to get your money back, up to a maximum of £50,000.
If you decide to hold the money as cash within the SIPP, you’re then normally covered under the standard £85,000 cover per person, per institution rule, the same as normal savings.
Ask your individual SIPP provider which bank the cash is held in (often it spreads it around up to five).
Then check whether any other savings you may have been in institutions linked to those used for the SIPP cash, as cumulatively you’ll only get up to £85,000 protection in each.
If you put money in stocks and shares or funds that invest in them, then you’ve got a risk-based investment, NOT savings, and a totally different FSCS protection applies.
Critically, FSCS protection for SIPPs is very complex – so this is just a general guide, always check with your provider.
It’s very important to understand that any protection only applies if you lose money because the investment’s product provider goes bust – in this case, the fund manager that you’ve bought into through the SIPP. Yet…
If the underlying investment goes bust, for example, if you have shares in a company and it goes kaput, or you’ve bought a fund and it performs poorly, then you’ve no protection as that’s the nature of investing.
SIPPs can be an excellent form of private pension for a particular group of people. It is, effectively, a low-cost DIY option that does not limit you as to what you can invest in and this puts you in complete control of your financial future.
Provided that you are willing to research investments or you have a financial adviser who can help, this could help you to build towards a bright future.