If you want to free yourself from being tied to the more established pension providers, you can do so by taking control of your own pension planning with a low-cost, do-it-yourself option called a SIPP (self-invested personal pension).
A SIPP is a pension scheme that lets you choose how, where and when your cash is invested and allows YOU to manage your pension pot, meaning you know exactly where your money is and all the costs involved.
HOW DOES A SIPP WORK?
Traditional personal pensions are managed by the fund managers of a pension provider, and they decide how your money is invested. As a consequence, your pension is limited to a fairly narrow mix of funds. The problem with this is that the fund managers tend to ‘err on the side of caution’ or, in other words, put your money in what they consider to be safe investments.
As every investor knows, the lower the risk, the lower the return – and annuity rates have been incredibly low recently.
With a SIPP you have control of where your money is placed by choosing your own investments so you can invest almost anywhere you like.
These are often referred to as ‘execution only’ transactions, which means that you have to take responsibility for your own decisions.
However, a SIPP is for someone who really understands the markets and the risks as well as the benefits; who understands investing, does their own research and is happy to spend time managing their investment portfolio and choosing their own investments.
DIFFERENT TYPES OF PENSIONS
- The government state pension
- A private pension
- An employer’s pension
A SIPP is considered to be a private pension, as it’s something you set up yourself.
However, if you are in a company pension scheme where the employer also makes a contribution to your pension, you need to be really sure that you would be better off before even considering a SIPP.
Just like all pensions, a SIPP is protected from the taxman – you pay the money into your scheme before tax is deducted.
When a basic-rate taxpayer who pays 20% tax invests £1,000, it only costs £800. For a higher-rate taxpayer who pays 40% tax, it would cost £600.
When you decide to take your money – from the age of 55 – you can normally take up to 25% tax-free. The rest will be taxed as income because you didn’t pay tax on it when it was originally invested.
THERE ARE TWO MAIN TYPES OF SIPPS
With this kind of SIPP, you are completely in charge of your investments and take no advice from the provider – hence the term ‘low cost’.
Some providers will allow you to start a low-cost SIPP with a sum as little as £5,000; though in reality, most experts agree that you should have an existing pension fund of at least £50,000 to transfer – either that or be in a position to contribute several thousand pounds per year.
When choosing a SIPP provider, you need to consider just how much you wish to be involved and the level of service you want. Some companies provide ready-made portfolios for people who don’t want to be fully in charge of their investment decisions.
This type of SIPP offers a very wide choice of investments, including commercial property. You’ll usually be able to speak with a specialised team who can help you make decisions as to what investments to hold in your SIPP. They will help you administer more complex investments, but it typically comes with higher charges.
PART TWO OF THIS ARTICLE TO FOLLOW.