A Self-Invested Personal Pension is the pensions answer to a Stocks & Shares ISA to investors – a tax-efficient wrapper designed to give you complete control over your pension.
What is a SIPP?
A Self-Invested Personal Pension is a tax-efficient wrapper for your pension investments. Many will refer to a SIPP as a ‘DIY Pension’ because the logic is that you are free to pick and choose your investments.
Broadly, there are three types of pensions – the state pension from the Government, a workplace pension, and a private pension. A SIPP falls under the latter category as it is something you create and are in charge of.
The Benefits of a SIPP: Choice & Protection from Tax
Like Stocks & Shares ISAs, a SIPP is essentially a tax-efficient wrapper from your investments that shelters your money from tax.
Firstly, you will receive income tax relief on your contributions to a SIPP:
If you’re a basic-rate taxpayer, a £1,000 investment into your pension will cost £800. Likewise, if you are a higher-rate taxpayer, your £1000 investment will cost just £600. This is because the income tax relief is applied at 20% and 40% respectively in these scenarios.
And as you’d expect, both the income and capital gains you make from your investments within a SIPP are tax-free. Similarly, as with other pensions, you will be able to receive 25% tax-free from the age of 55 with the rest taxed as normal.
The combination of the tax benefits in addition to the freedom of choice will likely be of great appeal to you, even more so if you do not have a form of workplace pension in existence.
However, it is worth noting that due to auto-enrollment, if you are an employee you already likely have a pension.
How much can you input into a SIPP?
The simple rule is that you can pay in 100% of your yearly earnings before tax up to a maximum of £40,000. The allowance declines by £1 for every £2 of income beyond £240,000, falling to a minimum of £4,000.
If you are a non-taxpayer, you can also make contributions of up to £2,880 per year – equating to £3,600 with basic-tax relief applied of 20%).
For those lucky enough, the lifetime allowance limit you can save into your SIPP or other pension stands at just over £1m, £1.0731m to be precise. Excess pension savings are taxed at 25% (in addition to Income Tax) or 55% if taken as a lump sum.
Are there different types of SIPP?
You will generally hear of low-cost SIPPs – these are the type of SIPPs for ‘DIY investors’. Online Brokers and Fund Supermarkets will give you a choice of a variety of shares and funds you can invest in.
The choice of Online Broker or Platform is up to you – some offer different levels of support, ready-made portfolios, and lower charges – but ultimately the decision is yours.
There is also another type of SIPP known as a ‘Full SIPP’ – however these are less mainstream with help for making decisions and administration of assets that are more complex in nature.
Shares, funds, investment trusts, and bonds – are just some of the assets that can be held in a low-cost SIPP that an Online Platform will give you access to.
Opening a SIPP & Understanding the Charges
Just as with an online Share Dealing Account or Stocks & Shares ISA, you can open a SIPP through an Online Platform or Fund Supermarket. It is easy to do so.
When opening a SIPP, you can choose to do so from the start; suitable if you don’t have an existing pension. Most platforms will enable you to start with monthly contributions or a lump sum.
You will also have the option to transfer to a SIPP from other pension pots – of the major advantages is you will transfer all of your pension pots in one place. Putting you in total control.
Selecting a provider for your SIPP requires careful attention as the charges differ significantly across key areas. You need to consider; the amount of your SIPP contributions, the expected value of your investments, how likely you are to switch investments, and how long you will be invested for.
Look out in particular for:
- Administration Fees – Some platforms will charge a fixed or % based fee based on the value of your investments annually. A large SIPP would therefore benefit from a fixed administration fee and a smaller one based on a percentage. Additional admin fees can apply and some may charge for transfers in and transfers out.
- Dealing Charges on Shares & Funds – These do vary. Fixed fees and percentage-based charging again apply. There is often a difference in terms of dealing charges on funds and shares – some providers may seek to charge for share dealing but not trading in funds.
- Other Fees (Including Fund Manager Charges) – Besides the charges levied by the Online Platform or Fund Supermarket themselves, you will also have to consider the ongoing fund management charge from the Fund Manager themselves (if you’re investing in a fund).
Easy to open, Tax-efficient, and Freedom of Choice – SIPPs are Popular
SIPPs are popular because they give you complete freedom of choice over your pension, are tax-efficient, and are relatively easy to open and maintain through Online Platforms.
If you do opt to transfer into a SIPP or create a SIPP from scratch, it’s important to give the selection of a provider just as much thought as where to invest due to the difference in charges based on usage patterns.