If appropriate to your particular situation, a Self-Invested Personal Pension (SIPP) could be another option to consider if you require the flexibility to choose where your pension money is invested. SIPPs are now also open to people of lower incomes – not just those with commercial property.
A SIPP is a personal pension wrapper that offers individuals greater freedom of choice than conventional personal pensions. However, they are more complex than conventional products and it is essential you seek expert professional financial advice.
SIPPs allow investors to choose their own investments or appoint an investment manager to look after the portfolio on their behalf. Individuals have to appoint a trustee to oversee the operation of the SIPP but, having done that, the individual can effectively run the pension fund on his or her own.
Thousands of funds
You can typically choose from thousands of funds as well as pick individual shares, bonds, gilts, unit trusts, investment trusts, exchange traded funds, cash and commercial property (but not private property). Also, you have more control over moving your money to another investment institution, rather than being tied if a fund under-performs.
Once invested in your pension, the funds grow free of UK capital gains tax and income tax (tax deducted from dividends cannot be reclaimed).
Unrivalled tax benefits
SIPPs, like all pensions, have unrivalled tax benefits. If you aren’t using a pension to save for retirement you could be missing out on valuable tax relief. In the current 2013/14 tax year you could receive up to 45% tax relief on any contributions you make and pay no income or capital gains tax on any investments returns inside your SIPP.
You cannot draw on a SIPP pension before age 55 and you should be mindful of the fact that you’ll need to spend time managing your investments. Where investment is made in commercial property, you may also have periods without rental income and, in some cases, the pension fund may need to sell on the property when the market is not at its strongest. Because there may be many transactions moving investments around, the administrative costs are higher than those of a normal pension fund.
The tax benefits and governing rules of SIPPs may change in the future. The level of pension benefits payable cannot be guaranteed as they will depend on interest rates when you start taking your benefits. The value of your SIPP may be less than you expected if you stop or reduce contributions, or if you take your pension earlier than you had planned.
A SIPP could be a suitable option if you:
– would like to have more control over your retirement fund and the freedom to make your own investment decisions, or prefer to appoint investment managers to do this for you and are prepared to pay a higher cost for this facility would like a wide range of investments to choose from
– want to consolidate your existing pension(s) into a more flexible plan
– need a tax-efficient way to purchase
Dividends received within a SIPP do not come with a 10% tax credit, so basic-rate taxpayers are no better off receiving dividends within a SIPP than receiving the dividends directly. Investors in a SIPP need to be comfortable making their own investment decisions about their retirement. Investments go down in value as well as up so you could get back less than you invest. The rules referred to are those that currently apply; they could change in the future. You cannot normally access your money until at least age 55. Tax reliefs depend on your circumstances. If you are unsure of an investment’s suitability you should seek professional financial advice.