How does a SIPP work?
A SIPP (Self Invested Personal Pension) allows you to control where and how your pension pot is invested. You can decide what assets to invest in, monitor the progress and switch your SIPP investments through online platforms. You generally have far greater investment choice than an ordinary personal pension or stakeholder pension. Setting up a SIPP account is quick and easy with either a lump sum or a regular monthly investment. Investments can be made in funds, ETFs, investment trusts & quoted shares. You can have more than one SIPP and you can even have a SIPP if you have a company pension. However, it may not be cost-effective to do so and your employer will likely only fund your company scheme.
From the age of 55 the proceeds from a SIPP can be accessed by either purchasing an annuity or by using the drawdown facility from your pension provider. Income in retirement is taxed at the recipient's marginal rate.
FSCS protection rules for a SIPP
If your SIPP provider goes bust any money held within the SIPP is protected under the Financial Services Compensation Scheme (FSCS) up to a value of £50,000 if it is a trust-based arrangement or 90% of its value if it is an insured SIPP (see below for the differences between each type). However, any assets or investments held within the SIPP should be ring-fenced so the FSCS should not be required in the event that your SIPP provider got into difficulty. If the provider of an underlying investment fund, for example, held within the SIPP went bust then the FSCS compensation rules covering that type of investment come into play. The FSCS covers all firms and product providers that are authorised by the Financial Conduct Authority (FCA).
SIPP tax rules and claiming back tax relief
Tax relief is available on SIPP contributions up to 100% of your income, as long as the total contributions do not exceed £40,000. It is possible to carry forward unused pension allowances from previous tax years. Bear in mind the £40,000 annual pension allowance is reduced to £4,000 in some cases if you are already drawing a pension income. SIPP contributions attract tax relief at 20% for a basic rate taxpayer, which is added to your SIPP automatically by the pension provider. A further 20% tax relief for higher rate taxpayers and 25% tax relief for additional rate taxpayers can be claimed through your self-assessment tax return.
It is possible to claim tax relief on pension contributions even if you do not pay any income tax. However, if you earn £3,600 a year or less the maximum you can contribute is £3,600 in a tax year, which include the 20% tax relief.
What types of SIPPs are there and what are the differences?
Low- cost SIPP
A low-cost SIPP is normally provided online by a SIPP provider offering a slightly restricted range of investment choice. Low-cost SIPPs can offer investment in funds, quoted shares, exchange-traded funds & investment trusts. Unlike a Full SIPP they do not offer investments in unquoted shares or owning property within the SIPP. As they offer a restricted choice of investments low-cost SIPPs have a low-cost fee structure. A low-cost SIPP has become a popular option for the DIY investor due to the low costs and the ability to manage investments online. There is also no need to seek financial advice to set one up. Popular low-cost SIPPs include Hargreaves Lansdown, AJ Bell Youinvest, Fidelity and Charles Stanley Direct.
A full SIPP offers the widest choice of investment options and may need independent financial advice to set up, especially if you plan to invest in esoteric investments such as property. With the wider choice of investment comes a more expensive fee structure. A typical investment in a full SIPP is between £150,000 and £400,000. These SIPPs are usually trust-based arrangments as mentioned earlier. Full SIPP providers include Suffolk Life.
Insured SIPPs are sometimes called hybrid-SIPPs. These are offered by insurance companies such as AXA, AVIVA, Legal & General etc. They predominantly offer the insurance company's own funds with the possibility of investing in some third-party funds, but not shares, at greater expense. These types of products were aimed at people who didn't want to incur the charges associated with a full SIPP, while not using its full investment range, but instead wanted a personal pension that could become SIPP-like (and only then trigger higher charges) should they wish it to in the future.
A Group SIPP is a collection of individual pension plans grouped together within one SIPP. Individual pension owners would normally have a relationship with other members of the scheme, such as employment in the same company. A Group SIPP would be beneficial to members due to reduced individual cost and ease of administration.
Things to consider when picking a SIPP provider
There are a number of things to consider before picking your SIPP provider.
Most SIPP providers offer investments in funds, ETFs & investment trusts and some offer investments in quoted shares, government and corporate bonds.
All SIPP investment platforms will charge an annual admin fee for providing the ability to manage your SIPP in one place as well as offering a range of investment tools. These annual admin fees are different across the various SIPP platforms and tend to be lower the more a client invests.
Dealing charges are levied when a client switches investments between funds or other investments and these charges vary between SIPP providers. Many providers do not charge for dealing in unit trusts but do when trading in investment trusts, ETFs and shares.
Fund manager charges and fees
Fund managers also charge an annual fee for the administration of a fund. Some SIPP providers have negotiated cheaper fund charges and pass these on to their clients.
With regard to fees make sure you check each provider's full list of fees for any extra charges before making your final choice.
What are the best SIPPs currently available
There a range of SIPP providers to choose from and we have picked out three of the best SIPP providers in the UK to help you.
- Hargreaves Lansdown Vantage SIPP - best low-cost SIPP for tools & functionality. Voted the best online SIPP provider 2017 (read our Hargreaves Lansdown review)
- Nutmeg - popular managed pension for beginners (read our Nutmeg review)
- A J Bell - one of the cheapest low-cost SIPPs for most people (read our AJ Bell review)
For a full analysis of the available SIPPs in the market read our comparison of the best & cheapest SIPPs.
Investing in a SIPP
It is quick and easy to open a SIPP with most SIPP providers requiring just the completion of some details online.
Once you have opened your account you then have to choose your investment amount and whether this will be a lump sum, a regular contribution, a transfer-in from an existing pension plan or all three. If you plan on consolidating a number of pensions into a single plan then it is worth reading our 'PensionBee review – is it the best way to find and consolidate your pensions?'
If you plan to make lump sum or regular pension contributions then ensure that any new contributions are below the maximum SIPP contribution allowed based on your tax year earnings and the annual allowance cap of £40,000. Also, remember it is possible to carry forward unused pension allowances from previous tax years as mentioned earlier.
The next step is to select your investments and allocate an amount to each. Don't forget you can also invest in cash when setting up a SIPP.
How to build a portfolio and pick what funds to invest in
Choosing what to invest in is an important decision that could significantly affect your final pension income when you retire. Most SIPP platforms offer a range of investment tools and regular investment information and updates that can assist your choice.
There has also been an explosion in the number of robo-advisers offering managed investment services where your money is invested for you based on your attitude to risk. Some of these robo-advisers already offer a SIPP product (such as Nutmeg) with others planning on offering SIPP products in the near future. With a robo-advice pension product you simply answer a multiple-choice questionnaire which is then used to select an appropriate portfolio for you to invest in.
If instead, you want to manage your own investment choices, via a low-cost SIPP such as Hargreaves Lansdown or A J Bell, then 80-20 Investor provides investors with specialist knowledge, research and fund shortlists to help them make more informed fund choices.
Cheap SIPP alternatives
As an alternative to a full-SIPP, a low-cost SIPP is a more cost-effective option. It is possible to set up a low-cost SIPP quickly and cheaply with one of the main investment platforms mentioned above, such as Hargreaves Lansdown. Low-cost SIPPs offer investment in funds, ETFs and investment trusts as well as quoted shares. However, investing in unquoted shares and some other assets, such as property, are not normally available.
Looking for a financial adviser near you?
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Alternatively, Hargreaves Lansdown, one of the UK’s largest firms providing restricted financial advice, is offering a £200 John Lewis voucher* to new clients.