If you’re looking for a SIPP (a self-invested personal pension) then you should first ensure that you thoroughly understand what SIPPs are and how they work. Here we take a look at SIPPs pensions with our SIPPs guide: to help you make an informed choice along with your qualified financial advisor before you choose the right provider for you.
SIPPs Explained: What is a SIPP?
A self-invested personal pension is designed to be an efficient way of saving for retirement.
As with all forms of pensions, a SIPP offers as much as 45 per cent in tax relief on your contributions without asking you to pay any further income tax or capital gains tax. Of course, tax benefits are dependent on your individual circumstances: while tax the government, as always, can change rules.
Usually, with a traditional pension, your investment choices are limited to a relatively short list of funds, typically those from the pension provider’s individual fund managers. By contrast, with a SIPP you can invest almost anywhere and select your own investments.
SIPPs Explained: How much can be contributed to a SIPP?
If you’re a UK resident under the age of 75, the general rule is you can contribute as much to your pensions as you earn: while receiving tax relief during each tax year. This means that if you earned £35,000 a year you could contribute a gross £35,000 towards a pension. The payment you would make is just £28,000: with 20 per cent (at the basic tax rate) being added courtesy of the taxman.
Of course the more you earn, the more you can claim back with a tax return offering an added incentive to high and top-rate tax payers.
With a SIPP pension there is no minimum investment level: however, most providers suggest a minimum investment of £50,000 or that you are transferring several thousand every year. In most cases, people transfer their pension policies into a SIPP for simplicity to consolidate their savings in one place.
SIPPs Explained: Who are SIPPs available to?
SIPPs are open to everyone – even those already contributing to an existing pension scheme. However, many SIPPs are more expensive than other pensions so it’s important to ensure you will capitalise on all of the investment freedoms they offer.
SIPPs Explained: What investments can you include in a SIPP?
There are many investments that can be included in a SIPP – but here is a list of the main ones:
– Commercial property.
– Deposit accounts.
– Fixed interest stocks.
– Government securities.
– Ground rents for commercial property.
– Insurance funds.
– Investment trusts.
– Open ended investment companies.
– Options and futures.
– Overseas stocks and shares.
– PIBS: also known as Permanent Interest Bearing Shares.
– Traded endowment policies.
– Unit trusts.
– Unquoted shares.
SIPPs Explained: Property investments
Many people use SIPPs to develop commercial property including shops, industrial units and offices. They can assist even if you don’t have the funds to buy the property outright because it is possible to borrow around 50 per cent of the net value of the fund.
So for example, if the SIPP is worth £150,000 then you could borrow £75,000 in order to buy that property giving you the opportunity to purchase a property valued at £225,000. Rent for the property could then cover mortgage payments and if there is no mortgage the rent can be placed into a SIPP pension and used for later investments.
SIPPs Explained: What about the charges?
Even though SIPP investments can assist with property purchases, there are a number of fees to consider with providers often imposing fees from £500-£750 for purchases. In addition, there are valuation fees and legal fees to pay as well as annual management charges. Here is a closer look at some of the fees that SIPPs may charge:
– Set-up fees: Usually ranging from £0-£750, the set-up fees with a SIPP usually range from £200-£400.
– Transfer in charges: There can be charges if you move your funds from other pensions into a SIPP.
– Annual fees: Ranging from £0-£1,000 they are meant to cover administration costs.
– Dealing charges: Buying and selling investments (except properties) can cost up to £35 with a SIPP.
– Property purchases: Typically you will be charged from £450-£650 when you use a SIPP to assist with the purchase of a commercial property.
– Exit charges: Should you decide to move to a SIPP with a different provider, you might be charged an exit fee.
– Additional costs: If you choose an investment adviser to help you with the management of a SIPP, they will typically charge you from 0.5 per cent of the value of your pension fund each year.
SIPPs Explained: How to choose the right SIPP for you
When choosing the right SIPP provider for you, firstly think about the type of investments that you want to make with your pension.
Generally, if you want to invest in stocks and shares and investment funds, then low cost SIPPs will usually match your needs. However, there are much more extensive offerings to choose from too: with insurance companies typically offering comprehensive SIPPs although you will often have to place a portion of your SIPP into the insurance fund before you can make the investment.
Meanwhile, SIPP specialists traditionally offer the widest range of investments.
SIPPs explained: How to find out more
Hopefully this information has provided you with some guidance about what to expect should you decide that a SIPP is right for you. Should you wish to find out more based on your individual investment strategy then you can contact Unite now to who can introduce you to a professional financial adviser.
PLEASE NOTE: This article is meant to be a general guide to SIPPs. It is not to be constituted as financial advice. If you are considering taking out a SIPPs seek independent financial advice first.