SIPP stands for Self-Invested Personal Pension, and they’re a little different from some other personal pensions as they allow the SIPP holder to make their own decisions when it comes to what their pension fund is invested in.
With many ordinary personal and company pensions, the investments are chosen for the pension scheme member, and little or no feedback may be given to show where the pensions are invested.
SIPPs are more of a DIY option, which of course can work out badly for some, and quite well for others.More about mis-sold pensions
SIPPs were created to give people more control and knowledge about how their pension is doing, and what the money is invested in.
They aren’t for everyone, but if people feel comfortable choosing their own investments either because they have certain goals or ethical preferences about where their money goes, they can be an option for some people.
A SIPP works as a tax-efficient vehicle for investment; a ‘wrapper’ that allows an often greater selection of investments to try to make money from, but the same rules about pensions apply.
They are operated by a SIPP administrator – a type of pension provider that often does not advise on the pension investments, but simply runs the pension on the SIPP owner’s behalf.
While making contributions to a SIPP may allow for tax relief (see an independent financial adviser to check this applies to your circumstances), withdrawing the money before retirement may have some fairly high tax implications, just like almost any other pension.
Want an oversimplification?
Normal personal pensions are a bit like buying a mystery bag of sweets – somebody has filled it with investments that you don’t know, and you get what you get.
SIPPs are a bit more like pick-and-mix: a DIY option for those that feel they know what they want.Want to speak to a SIPP claims specialist?
The flexibility of SIPPs mean there is often a wider choice of investments. Generally speaking, the following non-exhaustive list of investments have been accessible via SIPPs in the past, but this may vary from provider to provider.
It’s worth noting that while all investments carry risk, some present more risk than others. Investments not regulated by the FCA or those based abroad may be described as high-risk, and may not be suitable for many investors.Invested in high-risk SIPP investments?
Like many other pensions, transfers to SIPPs can be mis-sold, sometimes with serious consequences for the pension holder like with one of our clients, Alan, whose mis-sold pension case study we’ve made available.
For years, many people were cold-called and advised to swap to a SIPP in order to make high-risk investments.
Many of these investments were based abroad, or were unregulated by the FCA. Some turned out to be fraudulent, many simply collapsed.
While high-risk investments can often be made through SIPPs, they aren’t suitable for everyone. Sadly, many financial advisers ignored the risks and gave transfers to high-risk SIPPs the green light.
Now, £millions are paid out in compensation every year for people via mis-sold SIPP claims.More about mis-sold SIPP claims
If you’ve transferred to a SIPP, have it checked out by our SIPP claims specialists for FREE
SIPPs can seem complicated, and a lot of answers depend on your own circumstances. ALWAYS seek independent financial advice when making decisions about your pension arrangements.
SIPPs are a type of pension, and therefore are designed for use in retirement. Withdrawing your money may be possible before normal retirement age, however there are likely to be large tax implications.
Anybody looking to withdraw money from their SIPP should seek advice from a regulated financial adviser before doing so.
In some cases, money may become effectively ‘trapped’ in an illiquid investment, where in order to release the money the investment must be sold, but no buyer can be found.
The main selling point of SIPPs is greater investment choice. Many people either want to take on greater risk to potentially grow their pension faster. Others want to invest in an industry they know well because they feel confident placing their money in it.
Others take advice from financial advisers, however in some cases the advice is negligent or even fraudulent, and people can end up losing money through unsuitable SIPP investments.
Many people may be suitable for a SIPP, and usually this is down to a regulated financial adviser to advise on.
Some investments accessible via SIPPs may NOT be suitable however. Many high-risk investments are only considered suitable for somebody who is a sophisticated investor, or a high net-worth individual due to the risk the investments present.
SIPPs qualify for up to 45% tax relief on the money you pay into them, depending on your circumstances.
Many tax implications are applicable depending on your circumstances, what you invest in, and what you want to do. Seeking independent financial advice is often a good idea before making decisions that may effect tax.
With many SIPPs, there are different costs to consider. Some SIPPs may be free to set up, whereas others may cost a few hundred.
Annual charges vary too, either a flat-rate or a percentage.
Fund Fees may also be applicable, sometimes a few percent each year.
Finally, Exit Fees for leaving the SIPP or withdrawing money will again vary.