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A six-point guide to SIPPs

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Written by: Mark Taylor
01/12/2016
Only 14% of people feel confident explaining what a SIPP is to a friend so we go back to basics to explain what it is, whether it’s right for you and how it compares to an ISA.

1) What is a SIPP?

A SIPP is a self-managed pension fund that gives you scope to invest in a wide range of investment types – be it funds, equities, investment trusts, gilts, bonds, exchange traded funds and more.

2) Why is a SIPP different?

SIPPs work differently to standard pension funds, where an investment manager makes decisions on your behalf. Having a SIPP means your provider usually handles the majority of the administration tasks for you but any investment decisions are always made by you. It is up to you to decide how you want to approach risk and identify opportunities.

3) What are the benefits of using a SIPP?

SIPPs give you access to a wide range of different asset classes and as it is self-directed, you don’t have to pay the usual management fees. This gives you greater freedom over what you invest in. However, it is important to realise that no investment is risk-free.

The tax-relief on contributions made to a SIPP is the same as a traditional pension. So, for every £100, a basic rate taxpayer invests into a SIPP, as with a normal personal pension, this will actually result in £125 being added to their pension pot.

4) For whom is a SIPP suitable?

Almost everyone aged under 75 in the UK is eligible to open a SIPP but it’s best suited to those who want greater control over how their pension pot is managed, and know their way around the markets.

It’s also an option for people who will be making significant pension contributions, for someone who wants to consolidate all their pension pots into the same place and for people who want to keep their money invested after they retire so that they can draw down an income.

5) Is a SIPP the right vehicle for me?

You should only consider opening a SIPP if you have the experience of investing and are completely comfortable making your own decisions.

If you’re happy with the risks that come with self-investing then great, but it’s always worth considering seeking independent financial advice before making a decision about investing your money.

It’s worth noting that if you don’t have the right amount of investment experience, a stakeholder or personal pension would, possibly, be more suitable for you. This would give you a more limited choice of investments but you could choose a fund that has a range of assets in it, rather than picking your own.

6) SIPP vs ISA

Both SIPPs and ISAs offer a wider choice of investments and greater flexibility than your average pension, giving investors the opportunity to achieve better returns if they make the right choices.

The key distinction to bear in mind is that until April 2017 SIPPs save you more tax over the long term due to them offering a tax top-up when you pay money in, but ISAs let you get your money out if you need it there and then.

One thing to remember is that SIPPs are generally more expensive than ISAs, owing to the higher administration cost for providers.

It’s also worth noting that you don’t have to choose between ISAs and SIPPs because you can have both. A mixture of saving through SIPPs and ISAs will likely appeal to the majority of investors.

Mark Taylor is CEO of Selftrade from the Equiniti Group

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