You’ve probably heard the term “SIPP” doing the rounds, but what does it mean? And why don’t you have one?
What exactly is a SIPP?
SIPP stands for Self-Invested Personal Pension. SIPPs are different from traditional employer pension funds. They give you a lot more freedom when it comes to managing your pension and saving for retirement.
Employer administered pension schemes don’t tend to provide you with a lot of options when it comes to how your retirement funds are invested. A SIPP does. It gives you tonnes of flexibility by enabling you to invest in bonds, stocks, mutual funds or ETFs.
Think of a SIPP as a DIY pension. You pick investments and stay in control throughout the process, managing your savings online.
What can I invest in via a SIPP?
SIPP holders can deploy funds across a wide range of asset classes:
- Stocks and shares
- Investment trusts
- Gilts and bonds (including bonds) issued by foreign governments
- Open-ended investment companies
- Bank deposit accounts
- Commercial property
- Real estate investment trusts
- Offshore funds
Being able to diversify investments across different asset classes enables you to reduce the overall risk of your portfolio. Employer administered pension schemes do offer diversification, but having a SIPP gives you more visibility and control over how your funds are managed.
Who should have a SIPP?
Any UK resident under the age of 75 can open a SIPP. But SIPPs aren’t for everyone.
SIPPs tend to appeal to people who want more control over their retirement savings. That means being confident about making your own decisions on how to invest your money, and being comfortable managing a range of investments.
SIPPs work particularly well for people who want to consolidate all their savings into one pot before they retire, or those who want to continue investing after they retire and draw an income from their savings to fund their lifestyle.
For more impartial information and advice on whether a SIPP is right for you, you can contact Pension Wise, the government’s free pension guidance service.
A word on tax relief
Since SIPPs are pension schemes, they benefit from some fantastic tax advantages. This works in two ways:
- Investments in SIPPs are exempt from Income Tax and Capital Gains Tax, which means that your savings are free to grow without being eroded by taxation.
- You also get tax relief on your pension contributions. This means that the money you invest in your SIPP will be topped up by 20% by the government. So, for every £8,000 you put into your SIPP, the government pays in £2,000. If you are a higher rate taxpayer, you can claim back a further 20% or 25%.
Ultimately, you can get up to 45% tax relief on the money you put into a SIPP. Think of it as a tax-wrapper that operates in a similar way to ISAs, but with a larger allowance of £40,000 in 2019/20 and a lifetime contribution limit of £1.055 million.
There are also some inheritance tax benefits that are worth considering if you plan to leave money to your loved ones.
How can you get a SIPP?
There are different types of SIPPS available on the market and most of the large investment management platforms have offerings.
These include “Full SIPPs” “Low-cost SIPPs” and “Hybrid SIPPs”. Every SIPP is unique, with different fees and different investment options, so it’s important to read the small print and make an informed decision before investing your retirement funds.
It’s worth pointing out that SIPPs can be expensive, so it pays to be mindful of fees, which can eat into your returns over the long run.
Here at WiseAlpha we realise that SIPPs are an important tool for people saving towards retirement. So investments made via our online platform can now be held as part of your pension portfolio and enjoy tax benefits through a SIPP.
This means you can gain exposure to the senior secured and high yield bond market with your SIPP. In fact, pension funds are the single largest investor base in the senior secured and high yield market, highlighting the attractiveness of corporate bonds for self-investing pension holders.
To get started, you’ll need to open a SIPP with one of our approved SIPP trustees. Don’t worry if you already have a SIPP. You can still open one with our approved trustees. Or you can also switch from your current SIPP to one of our approved SIPP trustees if you prefer.
Find out more about investing with WiseAlpha. All factual information true at the time of publishing.
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