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 pensions plans, SIPP’s allow you the advantage of doing 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 uneducated in investment matters without proper financial advice.

What are SIPP’s?

A SIPP is a do-it-yourself method of investing towards your retirement. The need for SIPP’s came about when many pension holders became disgruntled with the poor returns and no longer wanted their pension pots being handled by others. The desire for control over where and how to invest your pension savings was the driving force behind the creation of SIPP’s, which offer a lot more flexibility than conventional pension plans. There investment breadth is far higher than just an insurance company managed fund, this can range from direct ETF’s 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 SIPP’s allow you to purchase stocks and shares from the international market also. 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. SIPP’s generally cost less in fees and charges than conventional pensions when switching from one provider to another. Because you can apply aggressive investment strategies and still benefit from the tax reliefs you can maximise your returns in a more efficient manner than most conventional pensions.

Disadvantages

Although SIPP’s can be advantageous to many, it does have its fair share of pitfalls and may not be the best pension option for all.

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 policy 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 make.

One of the main disadvantages however is the amount of money you can receive during your retirement period is dependent on how well your investment has performed. If your pension investments have fared poorly or been miss-managed then you could see yourself with a pension shortfall and not enough to get by on.