Pension funds provide a way for people to plan for the future, mostly for retirement years. With most pension funds, investors don’t have control over where their money gets invested. In most cases, it is the managers who decide where to invest and for how long. However, that is not always the case with Self -Invested Personal Pension or SIPPs.
As the name suggests, a SIPP is a special type of pension plan where a member or members have control over where their money gets invested. The greater degree of control when it comes to investment decisions, is what separates a SIPP from traditional pension plans.
In most cases, SIPPs come with a variety of asset classes from which investors can choose, designed to meet the needs and preferences of different investors. Likewise, such investment products are often referred to as ‘DIY pensions’ given the amount of control investors have over investment decisions.
How they work
SIPPs are ideal investment vehicles for people who want to have a say on how their savings get invested. When it comes to investment decisions, the control allows the investors to regularly review their investment portfolio instead of leaving the same to pension managers.
Most SIPPs offer a wide variety of asset classes to invest in; they include Exchange Traded Funds, Investment Trusts, Unit Trusts, bonds, and international shares. The asset class on offer varies from one SIPP to another, depending on the SIPP provider.
SIPPs are also ideal for people with expertise to make their own investment decisions when dealing with retirement savings. Similarly, SIPPs are available to anyone below the age of 75. In most cases, investors are allowed to start drawing down once they reach 55 years.
SIPPs charges are deducted from the investment pot regardless of how the investment performs. Charges vary from one SIPP to another and also depend on the SIPP provider.
Types of SIPPS
They come with the highest fees, given the vast array of investment choices they come with. In this case, investors are allowed to invest in a wide variety of asset classes with no limitations. In some cases, investment advice is usually available via the SIPP provider.
The fees can be flat or a percentage of the invested amount. Some come with an initial setup charge and an annual management charge.
Lite SIPPS comes with limitations on which investments one can make. In most cases, one is allowed to invest in one asset class. With this type of SIPP, it is possible to transfer it into a fully invested pension at some stage in the future.
One of Lite SIPPs’ biggest limitations is that they don’t offer the option of owning property directly or offshore funds and unquoted shares. With this SIPP type, you can pay a fixed administration charge or a percentage of the platform fee.
Deferred SIPP shares similar attributes to full SIPP but without the higher charges. In this case, one is accorded access to a wide array of investment products but written under a SIPP trust. The life of a Deferred SIPP begins as a personal pension.
Hybrid SIPP differs from the other SIPPs as it offers a mixture of funds through a SIPP and personal pension investment fund.
SIPPS are some of the best investment products for retirement, given the tax benefits always on offer. For instance, they come with tax relief on contributions, in addition to a 25% tax-free lump sum at retirement.
Flexibility and control over investment portfolio is an advantage that works well for people who wish to be in control over their retirement savings. In this case, one is able to make investment decisions based on what they would like to achieve without any restrictions.
The availability of different asset classes to choose from also works to the advantage of investors looking to diversify their investment portfolios. With Full SIPP, there is no limitation to which investment one can make.
In addition, most SIPPs accept employer contributions and offer online access to portfolio and switching facilities.
One of the biggest undoing with SIPPs is that they come with a higher cost structure as compared to a traditional pension. Some of the charges that people must contend with include set-up fees, annual management charges, and charges in buying and selling of assets.
SIPPs are not ideal for inexperienced investors. Such pension plans can pose significant risks than normal pension when one does not know what they are doing when selecting asset classes. Therefore, SIPPs are only ideal for people who are comfortable with their investment decisions. They also make sense for people who have a larger pension pot that allows them to increase their risk exposure.