A SIPP is a do-it-yourself pension which gives you complete control of your pension, where it is invested and to what degree. Unlike conventional pensions which are limited in what choice of investments they offer, with SIPPs you can invest in areas as diverse as commercial property and specialists investment funds.

Like with all pensions it has the added benefit of tax relief. This means that you can place money into your pension fund before income tax is deducted e.g. If you are a basic 20% rate tax payer who invests GBP100 into your pension pot, it would cost you GBP80 to do so.

A SIPP allows you to choose your own investment portfolio, with or without the help of an advisor, to help generate an income for you when you reach retirement. You can also use your SIPP to purchase an annuity.

Is A SIPP Right for Me?

SIPP’s offer a far greater level of flexibility over more conventional pensions and in some cases even lower running costs. While originally being aimed at those with larger savings, more and more people these days are turning to SIPP’s due to their new affordability as charges start to drop. You can even run a SIPP from as little as GBP250 per year.

It is important to note however that SIPPs are suitable only for those who have some understanding of investments. If not, you can appoint a financial advisor to make the investment decisions on your behalf.

If you wish you are even able to run a SIPP alongside a more conventional pension scheme.

How Much Can I Invest

While SIPP’s receive quite favourable tax reliefs, there is a threshold before your tax band can go up.

If you are earning and contribute 100% of your annual taxable income you will receive tax relief on funds up to GBP255K.

If you are not earning you can contribute up to GBP3600 per year and still receive the basic rate tax relief.

You can also arrange for your employer to contribute to your SIPP as part of your pay as well as transferring existing assets, whether they be current pension plans or shares, from a company scheme. You should note however that there can be exit fees and administration charges when transferring your existing scheme into your SIPP.

What Can I Invest

SIPPs offer a wide variety of investment methods for the pension saver, including stock market funds, futures, gilts, company bonds cash and even the option to invest in commercial property. Investing in commercial property can work out very beneficial for businesses who look to use their SIPP to purchase a property, while borrowing up to half of the purchase price.

The Difference in SIPP Provides

As a general rule of thumb, the wider the range of investments chosen the more expensive your plan will be to create and administer. To create a SIPP you will need to appoint an administration company as well as a trustee, however in many cases the SIPP provider can do this on your behalf.

There can be a number of charges that can be applied to a SIPP, but here is an example of the most common:

Annual Management Fees
As the name suggests, an annual fee that comes out of your investment.

Transfer Fees
When transferring money in our out of a SIPP from another pension scheme is it likely that you will be charged for doing so.

Set up Costs
Charges can vary from as little as zero to GBP500

Dealing Charges
Each time you purchase or sell an investment you may be subject to a fee.

Accumulatively, these charges can add up to thousands of pounds per year for those with more sophisticated, larger portfolios. You should also check to see what rate of interest you are receiving on your fund. If you are earning a low rate of interest you could be losing money due to factors such as inflation. Interest rates applied to cash in a SIPP vary from as little as 0.1% up to 5%.

Are SIPPS Safe?

Under UK legislation everyone is protected for up to GBP50K should your financial institution go into administration under the Financial Services Compensation Scheme. However, if you are investing in ‘risk-based’ investments they are not classed as savings and are not covered in the same way bank or cash deposits by the FSCS.

The compensation that applies to SIPPs is very complex and can vary with each product provider depending on your circumstances. It should be noted that there is no general compensation scheme that applies to your SIPP and you should always check with your provider.

It is vital to understand that you are only liable to receive compensation should your product provider go bust. If you have appointed a financial advisor on your behalf and he has made poor investment decisions and lost your money, you are not liable to compensation as it’s the nature of investing.

Generally SIPPs are not held by the broker you purchase it though. Pension providers simply act as a conduit for you to invest into whatever funds they offer. Therefore if your provider were to go bust, the money you have invested would still be safe as it would be held by the bank of fund manager currently investing it. Should your bank or fund manager also go bust then you are normally covered for the standard GBP50K that covers all financial institutions in the UK.

If you are holding investment funds which go bust then you can receive compensation for the first GBP30K of 100% and 90% for the next GBP20K.

You should always check with your SIPP provider in which bank the cash is held. In a lot of cases they may spread it around up to 5 separate banks to negate risk. If you have substantial pension savings spread across five banks, then technically you will receive up to GBP50K investor protection from each bank.