Sipps - Self Invested Pensions Funds Explained

Self Invested Personal Pensions, as the name suggests, are a type of personal pensio

where you pick the investments yourself. SIPPs are subject to the same rules as other personal pensions.

The permitted range of investments for SIPPs is very broad and includes stocks and shares on the world's major stock exchanges (and a few of the minor ones too, including those quoted on the AIM), investment trusts, unit trusts, gilts and direct investment in commercial property. There were plans to allow investment in residential property, i.e. buy-to-let, and other assets such as wine. However, the government back tracked on these proposals and now only allows indirect investment in such assets.

In the case of commercial property, If you're a business owner, a SIPP can be tax-efficient since the rent you pay to the SIPP comes out of the business's pre-tax income, before your corporation tax liability is calculated. The SIPP pays no tax on the rental income.  The purchase of smaller commericial units such as hotel room investments has also become possible.  A SIPP can also borrow up to 50% of its net value, which means leveraging your pension with a loan is now possible.

Many people take control of their investments and protect them from the taxman using ISAs. SIPPs is another way to shelter your investments from tax however, although until recently its use has been mostly confined to the very wealthy. In fact, SIPPs allow a broader range of investments than ISAs, allowing you to put money into AIM companies and commercial property for example. SIPP investment has soared in the last couple of years and continues to grow in popularity.

Most of the money currently going into SIPPs doesn't come from new contributions. Instead, people are using SIPPs to consolidate their old pensions, which could have been built up over years and spread over several companies.   Many got fed up with high charges and with poor performance that is inadequately explained. SIPPs allows you to see all your pension investments in one place, making it easier to see how they're doing and what size pension you might get through one propert portfolio planning.

On one side there are concerns that many people are not using SIPPs to their full effect, and only investing in the investment funds controlled by their pension provider. In this case, people are paying over the odds, as a straightforward stakeholder personal pension would suffice and this has lower charges. At the other extreme, there are concerns that many people will pile all their retirement funds into a series of high-risk investments and lose the lot through irresponsible investing.

Both of these are valid concerns but taking direct control of your investments is undoubtedly a good thing. Just be sure that you're comfortable with the risk you're taking on. Some Independent Financial Advisors can offer services such as stochastic portfolio modelling which gives individuals a much clearer understanding of the risks involved. 

SIPP charges have come down quite significantly although there are a few more types of charge to worry about with SIPPs than with ISAs. First of all there is usually a set-up fee, which can be a few hundred pounds although some SIPPs charge nothing. There are also annual fees and transaction fees on asset purchases (these can be as cheap as standard online brokers.   There are also other fees   like exit fees and for choosing an annuity when you finally get round to drawing your pension.

If you would like a confidential chat about your pension arrangements and how you could possibly benefit from SIPPs, feel free to contact me.