Many people lack a complete understanding of what SIPPs actually are. This is a real shame, as they can be of great benefit to those who choose to invest in them.
SIPP stands for Self Invested Personal Pension. This is, quite simply, a pension scheme that hands you control over how your retirement savings are invested. No other party – neither the government nor the company you work for – has any input into this, and this has earned it the epithet of the ‘DIY pension scheme’.
SIPPs have many benefits attached to them, mainly in terms of tax.
To find out more and discover whether a SIPP could suit you, just keep on reading.
How SIPPs Work
SIPPs work in a very similar manner to a standard personal pension, which means that they’re nice and easy to understand.
The main differences between them are all to your benefit, in that they provide you with a much wider choice of investments and greater flexibility as to where your money goes.
When you take out a personal pension, you’re limited to investing in the funds offered to you by your insurance company. Usually, this will give you between 250 and 1,000 options to choose from. With SIPPs, it’s much more common to have between 4,000 and 5,000 choices offered to you by providers such as Killik, and the added opportunity to invest directly in many other investments, from shares to ETFs and bonds.
Existing pensions can be moved into a SIPP through a simple transfer.
The Benefits of SIPPs
As mentioned above, the benefits of SIPPs are mainly tax related, although they are not restricted to this. SIPPs offer wonderful tax advantages; most notably, for every £8,000 you pay into one, the government will add a further £2,000. This is not restricted to the initial amount or money made from your investment. You also have the opportunity to make on-going payments at any point, with the same tax advantages open to you.
SIPPs also provide you with much greater flexibility and choice in a number of areas. Firstly, as discussed above, you have much more influence over where your capital is invested. This means that if you take the time to build your knowledge of investing, or are willing to seek the advice of experts in the field, you could potentially deliver a much greater yield. There is no limit to how large your pension pot can grow; it rests entirely in your hands.
In addition, you have a lot more flexibility when you reach retirement age. Beginning from the age of 55, you are at liberty to start drawing from your pension, and it is up to you to decide how you want to use the funds you’ve built. You may take up to 25 per cent of the total out as a tax free lump sum, and with the remainder you can decide between using the balance to provide you with a pension through income withdrawal, or through the purchase of an annuity.
If you’re beginning to consider your long-term future, and the prospect of retirement looms on the horizon, could a SIPP be of benefit to you?