SIPPS – “Self Invested Pension Plan”- Explained
SIPPS – Explained
A SIPP, an abbreviation of Self Invested Pension Plan, is a method for people to take a much more active role in their investments and access a much greater number of investment opportunities than if the fund was managed by a pension company. Subject to rules governed by HMRC, you become much more heavily involved in the decisions over where your pension fund is invested and can even borrow money to help fund investments. These could include the stock market, fine wine, residential property as well as commercial property, whichever you deem to be the most appropriate. If you feel you have a keen eye for investments and you are willing to undertake the risk element, a SIPP could be the most suitable option for you when you reach retirement age.
A SIPP can be set up by using an existing fund, by making contributions, or by using a combination of the two. Employers are also able to contribute towards a SIPP. You can make one off payments as well as regular payments into your SIPP. They are generally suited to people with larger than average pension pots. They allow you to take income from your pension is a variety of ways. The first is to take a direct income from your pension fund, called an unsecured pension or income drawdown. This means you will not be locked into an annuity rate, allowing you to take advantage of possible higher rates in the future. As well as this the rest of your fund (what’s left after you withdraw the benefits) stays invested and thus can accrue in value, should the investments perform. But you should be aware that investments can go down instead of up and so locking yourself into an annuity rate may turn out to be the best idea.
How much should I invest?
Currently in work - You could commit up to 100% of your earnings BEFORE tax, with an upper limit of £235,000 for the tax year ending March 2009. This will increase by £10,000 until 2010/2011 when the limit will be reviewed again
Not Working – You may pay in anything up to £3,600 and still be eligible for basic rate tax relief.
Investment Choices
As mentioned previously, there is a huge range of investment choices associated with a SIPP, much more than are available should you use a pension company or financial institution. However, that doesn’t automatically mean you will increase your income as a result. Some of the potential investments that can be made using a SIPP include shares, commercial and residential property, the futures market, government bonds to name but a few.
How much does a SIPP cost?
The amount you pay to set up and administer your SIPP will vary depending on which company you use to assist you and the types of investments you choose to commit to. By law you must appoint an administration company as well as a trustee, although many providers provide both these requirements, making the process smoother. There are a number of initial and ongoing charges that you will have to incur to set up a SIPP such as.
i) A set-up fee – This will vary, but can be as much as £500
ii) Transfer costs – Moving money from a share investment or other pension plan may cost you in transfer fees, as well as if you move it again.
iii) Investment fees – You may have to pay each time you make an investment. This could rack up if you want to move money around frequently.
iv) Yearly management costs – Every 12 months you must pay a management fee.
v) Interest rates – Not a direct cost of course, but worth considering should you keep cash in your SIPP. The interest rate paid on cash in a SIPP ranges between 0% and 5%, with the rate increasing with the amount you invest.
A safe option?
With large financial institutions, private equity companies and commercial property developers going bust in the past 18 months, you would be right to ask to question as to whether  a SIPP is a safe option for your money. Currently up to £50,000 of your money would be protected in an orthodox savings account, in a high street bank for example, should the bank fail. This is done under Financial Services Compensation Scheme (FSCS). However this scheme does not apply when you invest in risk-based investments like you would under a SIPP.
Proection under the FSCS for SIPPS is a highly complex matter, and varies from each product and provider. We advise to check this very carefully before you invest. It is also important to recognise that you will only get protection if the provider of the SIPP product goes under, not the underlying investment. So if the pension company you work with goes bust, you have some redress, but if the investment they put your finances into (such as a commercial property developer) goes bust, you are not protected. This is because you should have been made aware of the risk and this is the very nature of investments – it is at the end of the day a gamble or punt, with various degrees of risk.
If the pension company you work with for your SIPPS were to go into administration, unlikely though it is, your money would be protected because they only act as a middleman between you and the investments. The money you channel through them will be will the investments that they make on your behalf, such as shares or bonds for example.
SIPPS are open to the employed, unemployed, and self employed and can be run alongside a regular employers pension scheme. However because of the annual and recurring costs of running a SIPP, it might not suit those with smaller pension pots. Also you will need to have to time and inclination to consider and manage your investments.
