If you want to unleash yourself from pension providers and take control of your own retirement planning with a low-cost DIY option, then a self-invested personal pension (SIPP) might be the route for you.
A SIPP allows YOU to manage your pension pot, including where to stash it and what to invest in, meaning you know exactly how much it’ll cost.
What is a SIPP?
A SIPP is a DIY pension. Traditional personal pensions limit your investment choice to a shorter list of funds normally run by the pension company’s own fund managers. With a SIPP you can invest almost anywhere you like and choose your own investments.
But with that flexibility comes responsibility. A SIPP is for someone who understands investing, does the research and is happy to spend some time working at it. If you make the wrong investment choices, you’ve only got yourself to blame, so you must feel comfortable managing your own investment portfolio and picking your own investments.
If that’s not you, then see the Pensions MoneySaving guide for other pensions options.
If you’ve already saved into a SIPP and want to know how you can take your pension money, then you’ll need to read our Guide to Taking Your Pension 2016.
How do SIPPs work?
Think of a SIPP as being like a shopping basket. In that shopping basket you can place lots of different types of investments. The shopping basket (SIPP) holds those investments for you. And just like any other type of pension, it protects them from the taxman – you pay the money in before income tax is taken off. What this means in practice:
When a basic-rate taxpayer, paying 20% tax, invests £100, it only costs £80 (for a higher-rate taxpayer, paying 40%, it would only cost £60); the amount that would’ve been in their pay packet if they’d paid tax (see the How Pensions Work guide).
How to manage your SIPP
SIPPs can be managed completely online. Phone and postal services may be an option, but make sure you check with the provider to see if it costs more. You can buy and sell investments at the click of a button and keep an eye on how they’re doing, just as you’d check your accounts with online banking.
How to start your SIPP
You can either start it from scratch with money that hasn’t been held in a pension, or you can move it from an existing pension scheme.
- New contributions
If you don’t have a personal pension already and decide you want to start investing in a SIPP, you can open one either by making monthly contributions, or if you have a big lump sum you can invest that.
- Transfers from other pensions
If you already have a few pension pots, you can consolidate them all into a SIPP so they’re in one place. Or, if you’re not happy with your current pension plan, this could be an option.
If you do this, make sure you check there aren’t any penalties for leaving your existing pension and that it’ll actually be beneficial.
Bear in mind that unless you’ve opted out, or are self-employed, you already will have or will soon have a personal pension thanks to the new pension auto enrolment rules.
What SIPP is right for me?
There are two type of SIPPs:
- Low-cost SIPP
These SIPPs can be kept low-cost, because you’re in control of them and all the decision-making – that’s what ‘execution only’ means.
- Full SIPP
If you receive advice on a SIPP, it’s known as a ‘full SIPP’. This type of SIPP offers the widest choice of investments, but in return they typically come with higher charges.
What investments can I put in a SIPP?
SIPPs provide a massive investment choice. If you’re a first-time investor, don’t get carried away.
The experts advise that if you’re new to the investment game, it’s a good idea to buy share-based funds rather than individual shares – this will reduce your risk exposure if an individual company fails. To reduce your risk even further, buy a range of different funds.
Investments which can be held in a SIPP include
Unit trusts and Open Ended Investment Companies (OEICs)
Exchange traded funds (ETF)
Gilts and corporate bonds
How much can I put in a SIPP?
While you can save as much as you like towards your retirement, there are limits to the amount you can save in a pension such as a SIPP and still get tax relief:
You can contribute 100% of your annual earnings before tax up to a limit of £40,000 for 2016/17. If you earn more than £150,000, the amount you can contribute is gradually reduced at a rate of £1 for every £2 earned over £150,000, until the tax-free limit hits £10,000.
You can contribute up to £3,600 per tax year and still get basic-rate tax relief. So, non-workers can pay in £2,880 per tax year, to which the taxman will add £720.
In addition to your annual allowance, there’s also what’s known as a ‘growth time allowance’ – this is the amount you can save tax-free into your pension in your lifetime. It’s currently £1m.
How well off will I be in retirement?
Is there anything I can’t put into a SIPP?
Do I need to use an adviser to help me?
What’s the minimum I can put in?
How much will a SIPP cost me?
SIPP charges change from provider to provider and some can be expensive. You need to think about what sort of investor you’re going to be so you don’t get stung.
Take a moment to think about the investments you’ll hold, how much they’ll be worth and how often you’ll change them, before working out which provider will be cheapest for you.
The main charges you need to keep an eye out for are:
- Set-up fee
It can cost up to £500 just to set up a SIPP.
- Annual management fee
A yearly cost that bites a chunk out of your investment. Some SIPPs charge nothing for this, but you could pay up to £1,000.
- Dealing charges
Each time you buy and sell an investment you pay a fee. This can be up to £12.50 per trade.
- Exit/transfer fees
If you’re moving money into a SIPP from another pension or shares you may be charged (and if you move it elsewhere). This can cost around £50.
- Income drawdown charges
If you want to start drawdown on your SIPP, you’ll have to pay a charge. This can cost anything up to £300 for the initial set-up, then up to £150 a year in ongoing charges.
Best SIPP providers
Comparing the best SIPP providers isn’t simple. Which company will be best and cheapest for you will depend on how much and how often you invest. Very few providers are cheap for small and large amounts alike. As a general rule of thumb:
Percentage-based fees with no fund dealing charges tend to be best value if you’ve less than £50,000. Fixed-fee SIPPs with fund dealing charges can be cheaper if you’ve more than £50,000, depending on how often you switch funds.
The more sophisticated your SIPP and the wider the range of investments chosen, the more it will cost to set up and administer.
Something making comparisons even harder at the moment is new charging structures being released by providers as part of a forced change by the regulator. The good news is that, on the whole, this has reduced the charges from most providers as they compete for business.
Are SIPPs safe?
With normal savings accounts, up to £75,000 per person per institution is fully protected if your bank goes bust under the UK’s Financial Services Compensation Scheme (FSCS) .
But 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.