05.12.09
Pension for Dummies?A Simple Guide to SIPPs
Had enough of all the pension tension? Fear not, savvy investor– for here’s a simple guide to understanding SIPPs. Here, we will discuss everything you need to know about SIPPS, including SIPP tax relief, and related matters.
First things first—what does SIPP mean? It stands for ‘Self Invested Personal pension,’ a kind of pension that gives you, the investor, an added incentive in terms of overall control over the investment and its strategies. Personal pension schemes are normally offered by insurance companies but often limit your choice of investment to the range of investment funds that they can offer. A SIPP, on the other hand, gives you a broader range of investment funds to choose from, owing to the complete control it presents to the investor. Think of it as a personal pension wrapper in which you can invest almost any type of financial asset. And although a SIPP can be provided by an insurance company, you can always get it from a number of specialist SIPP administrators.
So how do SIPPs work? As the investor, you will have to appoint a trustee who will manage the operation of the SIPP. However, having done that, you also have the ability to effectively run the pension fund on your own. With a full-fledged SIPP, you can efficiently accommodate a broad range of investments, including bonds, shares, cash, hedge funds, commercial property, and private equity.
Once you have chosen the best SIPP provider, may it be an insurance company or administrator, it will establish the SIPP wrapper which will get all the tax benefits that are enjoyed by a basic personal pension scheme. Once the SIPP is already in place, you have to put in your lump sum or regular contributions which initially will be placed in a cash fund. In conjunction with an independent investment adviser, a balanced spread of investments will be purchased, through the capital in the abovementioned fund.
In terms of charges, they come in two kinds: the set-up fee and the annual administration fee. However, some may not even charge a set-up fee, especially in the case of low-cost SIPPs. With a limited scope of options, such as cash, shares, and funds, providers of this type of SIPP might not charge a set-up fee, but may charge a modest annual fee. Then again, a full-fledged SIPP might cost you £300 in set-up fees alone, with an annual administration fee of about £500. Since the charges are usually flat-rate, investors with larger pots may find this more favorable. Aside from the set-up fee and annual administration fee, some SIPP providers may charge you with transaction charges on matters such as dealing in shares and transferring investments around. That being said, it would be wise to compare SIPP providers to get the best possible deal.
With a SIPP, you have much more freedom in terms of the scale of contributions, thanks the new rules that heave been enforced back in April 2006. Today, you can put in up to 100 percent of your income, complete with full tax relief. Yes, you can still invest more than the limit of £225,000, but without the advantage of a tax relief. Still, even if you are a non-taxpayer, you can get basic rate tax relief on contributions made up to £3,600 per tax year.
Unlike other pensions, you are free to bring together a number of pensions under one SIPP umbrella, simply by transferring a string of different schemes into the SIPP. However, it would be wise to check if there are certain benefits that would be lost once you make the transfer. Also, you have to consider the costs of transfer before undertaking any action. Again, transfer charges may vary from one provider to another. Some may have no charges at all, while some may charge you from £75 to £350.
No matter how favorable SIPPs may seem, you still have to determine if they are the right pensions for you. So before starting a group SIPP or any other type of SIPP, you have to speak with a well-qualified pensions adviser, one who will analyze your situation, including your investment risk profile.
So how can you determine if SIPPs are suitable for you? For one, a SIPP would be ideal if you need significant flexibility in planning your pension. If you like to be in control over your investment, then a SIPP would do you good. The same goes with the investor who wishes to take a hands-on approach in planning his or her retirement. And if you have certain ideas regarding your investment which cannot be met by simply investing in an insurance company fund, then an SIPP is suitable for you.
But in general, such pensions may appeal more to higher earners since most SIPP contracts have relatively high minimum contribution levels. Also, an SIPP is a more popular choice for those with significant capital built up in other existing pensions that can be transferred.
Nonetheless, you have to remember that there are certain fees that must be met when you wan to establish and run an SIPP. So expect to pay an initial set-up charge, annual plan charge, initial fee on the investments that you will purchase and annual management charge on the said investments. Aside from this, you should also expect additional charges for any advice that you may have received prior to setting up the SIPP and related investments. Be sure to seek expert advice on quotes, options, along with the relevant paperwork in order to ensure that things will run smoothly.
So whether you are starting a pension for the first time or simply looking to get better results from your scheme, best if you would follow this simple guide to SIPPs. So take time to learn the ins and outs of starting and running a Self Invested Personal Pension, and you can be sure to make the most out of a cost-effective, flexible, and tax efficient way of saving for your retirement.
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