For the uninitiated, the world of pension investments can be confusing, and one question that appears time and time again is a simple one: what is a SIPP?
A self-invested personal pension (commonly called a SIPP), is a special type of pension that allows more control for the pension owner over what their hard-earned cash is invested into.
It’s more like taking on a normal investment than other less controllable pensions, allowing a great variety of things you can invest in, from forestry, plots of land, to consumables like wine!
However it is still a pension, designed to give you a good return on investment for when you reach retirement age.
The history of SIPPS in the UK
SIPPS are a government-approved personal pension and since they became available in 1990, thousands have transferred their available funds into SIPP investments to try and make their pension-pot work harder, for a sweeter tasting retirement.
Some investments are subject to tax charges by the HMRC, however part of the reason people find SIPPs so attractive is the number of tax exempt investment opportunities:
- Futures and Options
- Carbon Credits (VCS & Gold)
- Authorised trusts
- Unlisted shares
- Commercial properties
- Ground Rents
- Traded endowment policies
- Gold Bullion
- Recognised stocks and shares
With even more taxable options too!
A quick glance at the list gives you a good idea of why a Self-Invested Personal Pension might look attractive, with many schemes seemingly promising huge returns in comparison to a standard pension, albeit with a little more risk, and many do come through with the goods for their investors, with many a happy retirement funded by a well invested SIPP.
More recently, the industry decided to categorise these investments in 4 ways:
- Differed: majority of investments are held in insured pension funds. Income withdrawal is differed to a later date.
- Hybird: Some assets are secured in normal pensions, and some in a SIPP.
- Pure/Full: Unrestricted access
- Lite/Single Investment: Tendency for lower fees, One main asset.
How people go into a SIPP
Much of the interests in SIPPs is generated by IFAs (Independent Financial Advisors), who are qualified to give financial advice, and sell the idea of SIPPs to their clients (new and old), before putting them in touch with a SIPP Provider/Administrator to process it, getting paid plenty of commission in the process.
This is where things can get a little nasty.
In a perfect world, each investment is sold to each customer based on their suitability for the investment (how much does the customer earn each year, do they know what they are doing with investments, can they stand losing the money if the fund fails), and the IFA and provider furnish each customer will all the facts about their investment, including well-researched ROI information, and about the risk involved.
Sadly, for many reasons, mis-sold SIPPs are worryingly common, and usually relate to skipped safety checks on the investor and investment, leading to skewed details about how risky the investment is, and the selling of the investments to people who should never have gotten involved in the first place.
This classifies as pension mis-selling and is regulated and enforced by the big boys at the FCA, FOS and FSCS who provide compensation on mis-sold pension claims for those who have been wrongfully sold their investment – an essential service that provides investors with a safety net to counter the huge amount of risk they weren’t fully made aware of at point of sale.