What is a SIPP? (Self-Invested Personal Pension) - A Guide

Pensions

The pensions world is awash with jargon. Unfamiliar words and phrases can be off-putting, but at Raindrop we aim to make life easier.

We want to make it simple to access a pension, so that anyone can save for their future.  

Pensions are just a way to put money aside to provide for your retirement. Think of them as a way for present-you to take care of future-you.

Pensions work by paying regular contributions into a pot, which compounds and grows overtime. There are three main types of pensions in the UK: a state pension, workplace pension and a personal pension.

Self-Invested Personal Pensions (SIPPs)

Self-Invested Personal Pensions (SIPPs) are a type of personal pension. They’re a great choice if you’re self-employed and want to manage where your pension funds is invested or want to enhance your retirement savings (or all the above). SIPPs are ‘defined contribution’ which means the value of your retirement pot depends on the amount you pay in and the performance of your investments (which can go down as well as up). As with all private pensions, you can only access the funds from your 55th birthday.

SIPPs have become increasingly popular since their creation in 1990 - there are now over 2 million of them! A big reason for their popularity is the ability to choose where to invest your pension money. But with such flexibility comes responsibility. To maintain most SIPPs you’ll need to understand how investments work, research where to put your money and spend time managing your portfolio.

This might sound like hard work, but Raindrop’s SIPP keeps the investment options simple and limited. It’s easy to set up and manage, which frees up more of your time for other things. Take a look at the Raindrop SIPP here.

If you are interested in taking control of your pension funds, we can help you start. There are broadly two different types of SIPPs to consider.

 

Full SIPPs

These SIPPs offer the widest range of investment choices, such as:

 

●    Publicly traded stocks

●    Exchange-Traded Funds (ETFs)

●    Open-Ended Investment Companies (OEICs), unit trusts, etc.

●    Gilts and corporate bonds

●    Unlisted stocks

●    Commercial property

 

Depending on the provider, you may also have access to an investment adviser with a full SIPP. The advice - and the typically wider investment options - means full SIPP fees are generally higher than lite SIPPs.

 

Lite SIPPs

This type of SIPP is usually ‘execution-only’. This means the provider offers a platform for you to choose and manage your investments, with generally fewer investment choices and often no investment advice.

You’ll normally find listed equities, Exchange Traded Funds (ETFs) and bonds but not things like unlisted equity or commercial property. Some may just offer a limited number of predetermined funds. If you’re looking for simplicity and lower admin fees, ‘execution-only’ lite SIPPs could be for you.

 

Tax relief

Like other types of pensions, growing your money in a SIPP means it’s exempt from income and capital gains tax. When you pay into a SIPP from your net income, the government automatically adds 25% as a top-up for basic rate tax relief. If you’re a higher or additional rate taxpayer, you may benefit from even more tax relief. The idea is that the government ’refunds’ any income tax you previously paid on these contributions, within certain limits. Currently, on a £10,000contribution a basic rate taxpayer would receive a £2,500 ‘top up’ from the government through tax relief. This means that the individual’s total contribution would be £10,000 yet they would have £12,500 in their pot.

When you withdraw from your SIPP from age 55 you can take 25% of your total pot tax free. You can withdraw this 25% however you like, but you will pay tax on the remaining 75% when you withdraw it.  

 

SIPP account charges

If a SIPP sounds like it could be right for you, there are a few account costs to consider before you get going. These are costs that SIPP providers charge customers for using their platform, which vary according to the type of provider and the SIPP you choose.

There’s usually a platform fee which is either fixed or a percentage of your assets, normally around 0.2-0.6% paid annually. In addition to a platform fee, there are normally fund fees for the funds you invest in within the SIPP. These generally amount to 0.05-0.50% of your assets also paid annually. You may also come across a dealing charge, e.g. £10 for buying a share which are paid when you trade, as well as costs for transferring money in or out.

Is a SIPP right for you?

 

●      SIPPs  allow you to choose where to invest your pension money, especially in  investments which aren’t widely available.

●      You  can transfer other pensions into a SIPP.

●      There  are full SIPPs which provide more investment options and normally come with  higher fees.

●      There  are lite SIPPs which provide fewer investment options, are ‘execution-only’  and often have lower fees.

●      If  you do decide to invest in a SIPP, you’ll need to understand what you are  investing in and be comfortable with risk as the value of the SIPP may go  down as well as up.

●      You  should also keep track of your SIPP and monitor it from time to time.

●      The  value of the tax benefits of your pension depends on your individual  circumstances. Tax rules and circumstances may change in the future.

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