25 May What are self-invested personal pensions and are they right for you?
What are self-invested personal pensions and are they right for you?
A self-invested personal pension (SIPP) is a type of personal pension plan. Like any pension plan, a SIPP allows you to deposit money which is then invested, helping you to grow a pot of money you can use to live on when you retire.
The big difference between a self-invested personal pension and a standard pension is that with a SIPP, you have far greater choice in what you invest in.
Self-invested pension plans (SIPP) can give you more flexibility in your investments
Anyone aged under 75 in the UK can choose to set up a SIPP and you can transfer existing pension pots into a SIPP at any time in your life. You can also open a SIPP if you have an existing personal pension or workplace pension.
Typically, SIPPs tend to appeal to folks who are relatively confident in researching markets and making their own investment decisions. However, if you decide that a self-invested personal pension might be for you, you can also rely on the support of a financial adviser to maintain your SIPP.
Before we dive into the potential advantages of opening a self-invested person pension, we want to emphasise the potential downsides. Where there is opportunity, there is also risk – and investments can rise as well as fall.
But if you decide that a self-invested personal pension is for you, there are a number of upsides.
Benefits and features of a self-invested personal pension
The most obvious advantage of opening a self-invested personal pension is flexibility and choice.
With a SIPP, you can choose to invest your pension pot in a wide range of ways, including:
- company shares (UK and overseas)
- collective investments, including open-ended investment companies (OEICs)
- investment trusts
- and commercial property and land.
If you do your research (or receive support from a savvy financial adviser), you may find your investment pays off and you’re able to grow your pot. You wouldn’t necessarily have that flexibility or control with a workplace pension (although some schemes do allow you to choose from a range of funds).
You can also choose how much you wish to invest in your self-invested personal pension. Whether you wish to make regular payments or deposit a big lump sum, it’s up to you. An employer may also be able to make contributions to your SIPP.
As a pension scheme registered with HMRC, contributions to SIPPs qualify for tax relief. Any contributions you make are boosted by a payment from the government.
Buying commercial property using your SIPP
While there are a number of caveats, it’s possible to use your self-invested personal pension to invest in commercial property or land.
For people who are self-employed or own a business, you can use your SIPP to help buy your business premises. In typical circumstances, this approach tends to be the most tax-efficient way of buying a commercial building for your own business.
In this case, you pay rent at commercial rates to your SIPP. However, because rent is an allowable business expense, it will reduce the tax you pay on any profits from your business. Furthermore, the rent you’re paying into your SIPP will generally grow free of income tax and capital gains tax*.
For some business-owners, this can be a savvy way of purchasing a property they were going to invest in anyway. However, as we mentioned earlier, because the value of investments may go down as well as up, these benefits may not come to fruition.
Using your SIPP to invest in property is a complex topic and well worth seeking professional financial advice over.
What are the disadvantages of a self-invested personal pension (SIPP)?
That said, self-invested personal pensions are not for everyone. As we mentioned, just because you make a smart investment, doesn’t mean you’re going to grow your income – in fact, you may lose money in the process.
While the flexibility to invest wherever you want can be wonderful, not everyone wants that much control. Some folks have little to no interest in keeping an eye on the market or having a trusted financial adviser guide them through the investment process.
As a registered pension scheme, SIPPs are also subject to the same restrictions as most other pension plans. You’re not able to access funds unless certain conditions are met, usually relating to your age or health status. If you want cash handy, a SIPP is probably not the answer.
Self-invested personal pensions typically involve fees you may not see in standard pension plans. While there are a range of ‘low-cost’ SIPPs out there, some providers charge for set up and management. It’s worth considering what effect these charges may have on your investment returns.
Finally, for some folks, it genuinely makes more sense to continue contributing to a workplace pension – especially if your employer has a generous contribution rate. You can usually take advantage of a discounted default fund, too.
Should I take out a SIPP?
As part of a diverse financial portfolio, your SIPP can potentially allow you to grow your income and make your money go even further. But as we’ve emphasised, they’re not necessarily the right product for everyone.
If you’re deciding whether or not a SIPP is for you, it might help to speak to someone who knows what they’re talking about – and who’s going to listen to what you want, first and foremost.
Talk to our team of highly qualified and experience financial advisers about self-invested personal pensions today, and figure out whether a SIPP is the right call for you.
Together, we can explore the upsides and downsides of a SIPP but, more importantly, we’ll help you make a decision that’s based on who you are and what you want from your finances.
Please contact us to book a meeting to discuss this in more detail.
* Potential tax relief is based on taxation, legislation and HM Revenue and Customs practice, all of which are liable to change without notice. It’s worth being aware that the impact of taxation will depend on your unique circumstances.