By Mike Fosberry, Head of Financial Services at Smith & Williamson
What is a Self-Invested Personal Pension (SIPP)? First, we need to understand the distinction between the wrapper in which the investments are held and the investments themselves. Once this differentiation is fully appreciated the rest is quite simple.
The pension scheme is the wrapper or vehicle that affords a specific tax treatment to contributions going into it and investment income and gains arising within it. The pension must be administered in accordance with HM Revenue & Customs (HMRC) rules, which basically state that the funds can only be accessed after the age of 55.
Up to 25% can be taken in the form of a tax-free lump sum, whilst the balance must be used to provide an income in one of several prescribed ways. If the pension scheme breaks these basic rules it will lose its valuable tax reliefs.
Managing the investments
Having understood the pension wrapper, one needs to understand that there are many different ways of managing investments. These can cater for all shapes and sizes of investments as well as the risk profiles of the investors.
Insurance companies, banks, unit trust providers and certain other bodies are allowed to establish pension schemes. While the wrapper is generally the same, the investment options that each will offer can vary enormously.
At one end of the spectrum a basic insurance company pension plan might allow access to a small number of internally managed insurance company funds. But at the other end, a SIPP, which can be offered by the same providers, will allow access to any investment allowed for by the pension scheme investment regulations. SIPPs, therefore, offer the most flexibility, allowing investors to take control of their pension funds, as they would over their personal assets. This allows them to manage the funds themselves, appoint a discretionary fund manager or use some form of halfway house using advice given by an investment manager.
While care should always be taken over the investment of one’s assets, more focus tends to be placed on them as they grow larger. Some will be prefer to use their own expertise, but for most the investment choices are so numerous that they are likely to require professional investment advice. This is hardly surprising given the availability of a plethora of managed insurance company funds, their multi-fund offerings, the use of multi-manager investment strategies and collective investment funds generally, as well as the possibility of investing in shares and other securities on recognised stock markets.
A SIPP can also invest directly or via a property syndicate in commercial property and many SIPP investors take advantage of this facility. Some of the more unusual property investments in SIPPs include a football stadium and a zoo!
However, SIPPs are not for everyone and are best suited to pension funds valued in excess of £100,000, as otherwise they can be expensive in comparison to conventional pension contracts. They are a good choice for those who have a particular investment strategy in mind or where the SIPP fund is being managed alongside an existing personal investment portfolio.
Many people find insurance-based pension policies restrictive and opaque so the investment flexibility of a SIPP, combined with its transparent charging structure, is an attractive cocktail. Remember that the SIPP wrapper itself is a commodity so you shouldn’t pay more than you have to each year in charges. However, it is not just about charges, as good administration is arguably more important. Make sure you take professional advice before embarking on a SIPP.
To find out how a SIPP could suit you, contact Mike Fosberry by calling 020 7131 4250 or email
Watch a video of Guy Rigby, Head of Entrepreneurs at Smith & Williamson, giving advice on how to manage cashflow.
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