Understanding Self-Invested Personal Pensions (SIPPS)

A Self-Invested Personal Pension (SIPP) is a type of pension for people that are both happy and comfortable in making their own investment decisions. One advantage of a SIPP is that we have full control and discretion over our money and decision making, however one should ensure that they understand the risks they are taking when assuming full responsibility.

In this article we will cover SIPPs in detail and explain the various benefits and downsides.

What Are The Key Features Of A SIPP?

There are many key features of a SIPP, which are bullet pointed here:

  • SIPPs be used to hold equities, funds, ETFs, as well as other assets such as commercial property
  • SIPPs work the same way as other pensions in that you can add money as and when you like, and the government also pays in an extra 20% in pension tax relief
  • If you are a higher rate tax payer, you can often claim back more in your tax return
  • Money in a SIPP can be used to grow freely and is exempt from UK Capital Gains Tax and Income Tax
  • SIPPs can be passed over to a spouse in any event of death provided the owner of the SIPP was under 75 when they died

What Are The Advantages Of Holding A SIPP?

SIPPS give the holders flexibility and the potential for higher risk returns due to being able to choose your own level of investment risk. They are also tax efficient due to the government matching savings with pension relief.

You can also contribute up to £40,000 into your pension each year that is free from income tax – meaning that your money isn’t taxed before it goes into the SIPP and is only taxable at the other end.

However, if you earn less than £40,000 a year then you’re only able to contribute as much as you earn each year (or up to £3,600 if you earn less than this figure.

Up to 25% of the SIPP can be withdrawn tax free, although tax will need to be paid on remaining drawdowns as taxable income.

What Are The Disadvantages Of Holding A SIPP?

There is a lifetime total of £1,055,000 allowance on a SIPP and you will pay tax on any pension savings you make above this limit. The excess is taxed at either 25% plus Income Tax, or 55% as a lump sum.

Managing your own SIPP can also bring about a higher risk of loss for those who are not sufficiently educated, and so this should be done only for people who are comfortable with their understanding of the stock market and investments.

When Can I Take My Money From My SIPP?

When you reach your 55th birthday the SIPP is eligible to be withdrawn. However, this will change to when you are 57 from 2028.

Can I Have A SIPP As Well As Other Pensions Like My Company Scheme?

Yes, you can have a SIPP alongside other pensions such as a company scheme.

Whilst it is generally not beneficial to opt out of the automatic enrollment that came into force in 2012, it is possible that business owners and company directors may prefer a SIPP if they are contributing material amounts and prefer to manage this money themselves.

SIPPs also offer the benefit of going into cash, which can protect against market volatility to the downside.

Should I Choose A SIPP Or An ISA?

One doesn’t need to choose between a SIPP or an ISA as we can have both. The big difference between SIPPs and ISAs however is that many types of ISA – at least Stocks & Shares ISAs as well as Cash ISAs – are easily accessible without incurring a penalty (this is not the case for the Lifetime ISA).

Another key difference is that there is no limit as to how much you can withdraw from an ISA account. Therefore, if you are lucky enough to build your ISA accounts up to say £5,000,000, then all of that money is able to be withdrawn completely exempt from any tax.

One more difference is that money going into an ISA must be done after income tax has been paid, whereas money going into a SIPP does not get taxed for income straight away and is able to compound.

Can I Set Up A SIPP For My Kids?

Yes – Junior SIPPs can be set up for children.

A Junior SIPP is managed by the parent until the child turns 18. Whilst a Junior SIPP can be a good way of starting a retirement fund for your child, the account control transfer to the child on their 18th birthday.

The money cannot be withdrawn then, but it is a risk that money is quickly lost due to bad investment decisions or gambles made whilst young.

It is possible to deposit up to £2,880 per year into the Junior SIPP, and with the government’s tax relief added this figure becomes £3,600.

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