Self Invested Personal Pension (SIPP)

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THE FACTS

A self-invested personal pension (SIPP) is a form of personal private pension that holds your chosen investments until you retire.    It is a type of personal pension and works in a similar way to a standard pension but with the major difference that you choose the funds, investments, stocks that you wish to invest in.   SIPPS are gaining more popularity because of their flexibility as you decide how much, when and where you invest.   It has the same tax benefits and it is great for those individuals who understand investing and want to manage their own fund choosing and switching, their investments when they want to.   There are two types of SIPP pension one that is fully managed (higher charges) and one that you manage yourself (lower charges).  The low cost SIPP that you manage yourself is the one that has less charges.

This article does not offer personal advice and does not confirm eligibility.   We recommend that you seek professional advice from a regulated Pension Advisor if you are thinking of opening a SIPP.  

TAX RELIEF EXAMPLE

If you are earning £60,000/annum in the tax year 20/21 and pay £5,000 into a SIPP the following calculations would normally be applicable:

The amount you actually pay into your pension would be £4,000

Amount of basic-rate tax relief added £1,000

Amount of higher-rate tax relief you can claim back £1,000

The total amount of tax relief is £2,000

The total cost of your pension contribution is £3,000

INVESTMENT CHOICES

You can invest in many different funds in many different countries and regions of the world, for example the Far East, North America etc….   By investing in a range of funds rather than individual shares you are spreading the risk.    You can invest in high risk or low risk investments and the choice is huge.   If you are investing for the first time and are not a confident investor do some research and/or consult a professional.

SIPPS ARE MANAGED ONLINE

SIPPs are managed online and you can buy and sell investments at the click of a button.  You can always see how well you are doing by logging on to your provider’s website and checking the fund and investment valuations.

STARTING A SIPP

You can start a new SIPP from scratch or you can transfer money in from another pension pot.   You can choose ad hoc contributions, lump sums, monthly or quarterly contributions.  It is up to you how much you invest and how often.   There are rules on the amount you can invest so check the government HMRC website for details.

TYPICAL SIPP ADMIN FEES

Some providers offer no account opening charges.  Typical administration charges start at around £25/quarter for investment holdings of less than or equal to £50,000.  £50/quarter for holdings of more than £50,000.  Providers allow you trade on both UK and International markets for typically around £5 per trade.  You will also earn interest on cash balances.   There are comparison sites available to help you find the right provider to suit your needs and budget.  You will need to consider the following:

  1. Annual administration charge
  2. Annual charges for funds and shares
  3. Dealing charges
  4. Exit fees
  5. Start-up fees
  6. Transfer fees
  7. Draw gown fees

WHEN CAN YOU TAKE YOUR MONEY

You can start withdrawing money from your SIPP from age 55.  The first 25% you withdraw is tax free after that you are subject to tax in the normal way.  

SIPP AND INHERITANCE

There are some great benefits in terms of inheritance and many people do not realise that if you die before taking any money out of your pension, it will be passed on tax-free to your beneficiaries subject to the following rules:

  1. If you die before age 75 your beneficiaries can take the whole pension fund as a lump sum tax-free.  
  2. If you die after age 75 your beneficiaries have several options but they need to tax plan to minimise the tax:
  3. They can take the whole amount in cash and pay the income tax.  This will be high if they are in the higher rate tax bracket.
  4. They can take regular income and most likely reduce income tax liability by sound planning.
  5. They can take out ad hoc lump sums in a manner that best reduces income tax liability.

Roger Gunning FCMA CGMA

23rd October 2020

Gloucester Office