Definition of a SIPP

SIPP stands for Self Invested Personal Pension which is a pension plan where the owner is both the contributor and investor. Unlike conventional pension plans, SIPPs allow you the advantage of making your own investments. Although this method of pension planning may be favourable to many, it does carry potential risks and should not be considered by persons who are inexperienced in investment matters without proper financial advice.

What are SIPPs?

A SIPP is a do-it-yourself method of investing for your retirement. The need for SIPPs came about when many pension holders became disgruntled with the poor returns and no longer wanted their pension pots being handled by the providers or their employers. The desire for control over where and how to invest pension savings was the driving force behind the creation of SIPPs, which offer a lot more flexibility than conventional pension plans. Their investment breadth is far higher than just an insurance company managed fund. This can range from direct ETFs (Exchange-Traded Funds) to thematic funds to some structured products.

Benefits

The main advantage a SIPP holds over more conventional pension plans is the freedom to invest. Not only can you invest in your regional market, but a SIPP allows you to purchase stocks and shares from the international markets. Furthermore, you can invest in unit-linked funds, investment trusts and even commercial property

If you are unsatisfied with the returns, you can quickly and easily change your investment options to take advantage of recent trends. Because you can apply aggressive investment strategies and still benefit from the tax relief, you can maximise your returns in a more efficient manner than most conventional pensions.

Disadvantages

Although SIPPs can be advantageous to many, they do carry an element of risk, do not have inherent guarantees (on investment return or income) and therefore are not be the best option for everyone’s circumstances.

Firstly, there are the costs involved in creating a SIPP. The majority of SIPP providers will charge a flat fee of the total amount invested and will also charge an annual fee to keep the plan running. If the pension pot is small, then these costs can be comparatively high. Additionally, you are charged each time you purchase or sell an investment and on any income you take.

Secondly, the amount of money you receive during your retirement period is dependent on how well your investment has performed. If your pension investments have fared poorly, then you could see yourself with a pension shortfall.

Thirdly, if the pension fund receives a transfer from a Defined Benefit (such as ‘Final Salary’) fund, then the benefits you are giving up on transfer may be greater or more appropriate to your situation than you could achieve with a person pension.