Self Invested Personal Pensions (SIPPs)
What are they?
SIPPs are money purchase type pension plans that allow you to hold any investment that is allowed to be held within a pension.
The big advantage of using a SIPP is that you're not shackled to a pension provider's own range of funds, which might be mediocre (many are). Think of it like a wrapper
that allows you to cherry pick the best investments in the marketplace within your pension.
However, not all SIPPs are created equal. Some, usually the most expensive, allow every conceivable investment to be held (including commercial property). Others offer a
wide enough range to keep most investors very happy, while a few are more limited and don't really deserve to be called SIPPs at all.
Also, this comes at a price. While SIPP costs have fallen in recent years, you could still end up paying rather more than a stakeholder. They're only really worthwhile
if you'll actually make good use of the investment freedom offered.
Who can own one?
Almost anyone, including children, provided they're under 75 and normally resident in the UK. You can contribute even if you already contribute into another pension, subject to the rules on overall pension contributions.
How much can I contribute?
The minimum varies between SIPP providers, but the lowest is typically around £1,000 for lump sums and £50 for monthly savings.
The maximum annual amount, while still enjoying tax relief, is 100% of your UK earnings (but no greater than the annual allowance, see the
Candid Money guide to pension rules), or £3,600 if that is greater. This means that non-earners, including children, can enjoy basic rate tax relief on contributions up
to £3,600 a year, i.e. they only need to pay £2,880 to enjoy a full £3,600 contribution - although SIPP charges might make this
prohibitive.
You're also allowed to contribute into someone else's SIPP, e.g. your spouse or grandparents contributing for their grandchild. They'll get the tax relief at basic rate, it won't affect your own tax bill.
How flexible is a SIPP?
This depends on the provider because, unlike stakeholder pensions, there is no set of rules. However, it's a good idea to make sure you can stop and start payments as you
wish without penalty and transfer your pension fund to another provider without a prohibitive penalty.
How much will it cost?
SIPP charges vary widely between providers. To some degree charges increase if you want the widest possible investment choice, so don't overpay for investment options you
may never need.
The types of potential charges are more complex than stakeholder, so make sure you thoroughly understand these before signing on the line. Expect to pay charges for the Sipp
'wrapper' then charges for the investments held inside. If you buy a fund-based Sipp the provider may reduce wrapper costs using commission received from fund providers.
| SIPP Charges - What to expect |
| Charge Type |
Typical Level |
What is it? |
| Plan Set Up |
£0 - £500 |
Initial plan charge regardless of the underlying investment(s) |
| Plan Annual |
£0 - £1,000 |
Annual plan charge regardless of the underlying investment(s) |
| Fund Initial |
0% - 5% |
Initial charge if you buy any funds |
| Fund Annual |
0.5% - 1.5% |
Annual charge on any fund held |
| Sharedealing |
£10 - £100 per trade |
Cost per trade to buy and sell shares |
| Examples shown for guidance only, other fees may apply so always check before buying. |
Charges could also apply when you buy an annuity, transfer to another pension, draw an income ('drawdown'), or die before you take benefits. These should all generally be below £100, if they're significantly more be wary.
Investment choice
This should be the sole reason you choose a SIPP over a stakeholder or conventional personal pension. The main allowable investments are:
- Shares listed on any stock exchange.
- Gilts and corporate bonds.
- Unit trusts, investment trusts and Oeics.
- Exchange trade funds (ETFs).
- Hedge funds.
- Insurance company funds.
- Traded endowment policies (TEPs).
- Gold bullion.
- Bank accounts.
- Commercial property.
While it's technically possible to hold residential property, antiques and art etc. in a SIPP, penal tax charges mean its simply not worth it.
The cheapest SIPPs on the market generally offer a bank account and access to shares, unit/investment trusts and Oeics. For many, this is sufficient.
Read the Candid Money guide to pension investment choice to find out more.
Protected Rights
If you have contracted-out of SERPS and/or S2P, you will have built up a pension pot called 'protected rights'. This traditionally had to be held in a stakeholder or personal pension, but from 1 October 2008 it's been possible to hold these in SIPPs too.
Should you consider moving your existing protected rights pension across to a SIPP? Only if you'll actually benefit from the increased investment choice and don't suffer a prohibitive transfer penalty on your existing scheme.
Investing in property
You can invest in commercial (not residential) property within your SIPP. This is most practical if you wish to hold your business premises in your pension to take advantage of pension tax reliefs. However, bear in mind the costs of doing so
are likely to be thousands of pounds initially with annual charges of hundreds, if not thousands of pounds.
You can take out a loan within your SIPP for up to 50% of the pension value.
What happens when I retire?
You can take up to 25% of your pension fund as a tax-free lump-sum. The balance is used to purchase an income for life using an annuity. You're allowed to shop around for the best annuity deal (called an 'open market option'), so make sure you do.
It could make a difference of thousands of pounds over the rest of your life. You could also have the option to instead draw an income, leaving your pension fund invested. To find out more read the Candid Money guide to annuities.
What happens if I die?
This depends on your age and whether you've already taken pension benefits. For full details see the Candid Money guide to pension rules.
Ways to buy a SIPP
SIPP ProviderFund SupermarketFinancial AdviserDiscount Broker
A few SIPP providers offer their SIPPs direct to the public, but these tend to be straightforward unit trust/share based products. Most SIPP providers sell their product
through financial advisers.
Most fund supermarkets offer unit trust based SIPPs, sometimes with the ability to buy shares too. For many the investment choice will be ample and charges
better value than a higher-end SIPP. However, you might save money by buying a fund supermarket SIPP through a discount broker especially if they rebate some, or all, of
their annual trail commission from the underlying unit trusts.
You need to be careful here. If your pension needs are complex you should find an independent adviser who specialises in pensions. However, you'll also want an adviser who specialises
in investments to help you make the most of your SIPP. Trouble is, good advisers who specialise in both are not that common, so be prepared to choose carefully.
If your pension situation is straightforward, then consider choosing the SIPP yourself (a fund supermarket SIPP is likely to suffice for many) and just decide whether
you need a financial adviser to recommend the underlying investments for you. If an adviser recommends a fund of funds unit trust then be wary, this is probably because it
makes their life easier (or they're not an investment specialist) and not because it's the best option for you.
Buying a unit trust within a SIPP through a financial adviser usually means paying the full initial and annual charges (some advisers negotiate a small initial charge
discount), but you should receive advice in return as the adviser is paid a sales commission from the fund manager. If the adviser works on a fee basis then they should
refund or waive all commissions, effectively reducing your initial and annual charges (by around 3% and 0.5% respectively).
If you're fairly comfortable picking a fund supermarket SIPP and deciding yourself what unit trusts to buy, then this is by far the cheapest route. Discount brokers
don't give advice, but will share with you the commission they receive from fund managers. Most will provide a fair amount of fund and investment information, ranging from
thinly disguised sales material to genuinely useful comment and research.
As a minimum you should expect any initial commission to be waived, which should reduce your fund initial charge to 0.5% or less.
Some discount brokers also rebate a share of the annual (or 'trail') commission, usually up to half. This is worth seeking out as it could save you a fortune over time.
There are a handful of discount brokers who'll rebate all fund commission, both initial and annual, and instead charge a flat annual fee of around £10-20 and a one-off initial
fee for the SIPP of about £35 - £50. Service and assistance will be 'bare-bones', but this can be great value if you're a competent investor.
If you wish to hold shares then the SIPPs offered by online stockbrokers are likely to be the best value.
How much commission do they pay?
Commissions tend to be paid on the SIPP plan itself (i.e. the 'wrapper') and the underlying investments. Note shares and investment trusts don't normally pay commissions.
| Typical SIPP commissions |
|
Initial Commission |
Ongoing Annual Commission |
| SIPP Plan |
Usually set by the adviser and added to your costs. As a result can vary widely. |
Usually set by the adviser and added to your costs. As a result can vary widely. |
| Unit Trusts / Oeics |
3% |
0.5% |
| Insurance Funds |
7% of the initial investment (if no annual commission) 4% of the initial investment (with
annual commission) |
0.5% |
To find out more about commissions and how they work, read the Candid Money guide to financial advice here.
SIPP Pension Jargon
Here's some of the more common SIPP pension jargon you might come across:
| SIPP | Self Invested Personal Pension, a money purchase type pension that allows you to hold any investment that is allowed to be held within a pension. |