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SIPPs explained
Pensions are designed to help individuals save for their future and retirement. However, a lot of traditional pension schemes don’t have the flexibility and freedom to invest your funds where you want to. With conventional pension schemes, it isn’t always clear where or how your money is being used. If you want to take control of your retirement fund and do it yourself, then a self-invested personal pension could be a great option.
A self-invested personal pension (SIPP) is a type of pension that gives you greater flexibility on how and where your money is invested. They provide a wide choice of investment funds and give more control over managing your pension funds. Most SIPPs allow you to make changes to your pension scheme at any time, to help you provide for a retirement that suits you. A SIPP is a type of personal pension, and they work in a similar way to a standard personal pension, just with more freedom to choose the investments you want.
More traditional personal pension schemes limit your choice of investments to a small selection of funds, SIPPs allow you to invest your pension fund pretty much anywhere you choose. Many firms offer SIPPs but provide little advice on where to invest the funds, giving you greater flexibility over where your pension pot is going.
This flexibility comes with a huge responsibility and is an excellent option for those individuals who fully understand investing and happy to spending time researching their various options. If a poor investment choice is made, there is only yourself to blame, so it is essential that you are confident managing your own investments before getting a SIPP.
A SIPP is a type of private pension as opposed to an employer pension, as it is set up by you, although it is still protected from tax as with other pension schemes because the money is paid in before income tax is deducted. Many SIPPs have higher charges than other pension schemes, making them more suitable for those with substantial funds and investment experience.
There are two main types of SIPPs, and these depend on whether or not you want to receive advice on where you should be investing. The main thing to consider when choosing a SIPP is how involved you want to be with the investment choices.
If you do not want to take any advice from the SIPP provider and be fully in control of your own investment choices, then a low-cost SIPP is the option for you. Some low-cost SIPP providers will let you start by investing as little as £5,000, but it is recommended to have an existing pension fund over £50,000 to transfer in and be able to add several thousand pounds to the pension every year.
These types of SIPPs offer the most extensive choice of investments and provide access to a dedicated team who are available to help you decide which investments to choose. They can also help to administer more complex investments including commercial property. In return for this additional service, these SIPPs often have higher charges.
How much can you pay into your SIPP?
As with any pension scheme, there is a limit to the amount that you can save for your pension and still get tax relief. As an earner, you can contribute 100% of your earnings tax-free up to £40,000. If you are earning more than £150,000, then the amount you can contribute is reduced at a rate of £1 for every £2 earned over the £150,000 threshold until the tax-free limit hits £10,000. Non-earners can contribute up to £3,600 per tax year into their pension and still get basic tax relief.
SIPPs can either be started from scratch or moved from an existing pension scheme. If you do not already have a pension set up, you can start investing in a SIPP by either making monthly contributions or investing a large lump sum if you have one. If you have one or more pension pots already set up, they can all be consolidated into a SIPP so you can manage them all in one place.
Unless you are self-employed or have chosen to opt-out of a pension scheme, your employer will have set you up with a pension scheme automatically. This employer pension scheme is added to by your employer, which is not an option when it comes to a SIPP.
Looking to invest into a SIPP? See which providers offer the best schemes and get expert pension advice.
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