What are SIPPs?
Whether you wish to enjoy your hard-earned "leisure years" at home in the UK, or abroad in a more temperate climate, Self-Invested Personal Pensions (SIPPs) are a tax-efficient way to save for retirement.
SIPPs have wider investment powers, enabling investors to invest in any of the following should they so wish:
- Stock exchange listed investment trusts
- Commercial property
- Gilts and bonds
- Stocks and shares
- UK government bonds
- Foreign government bonds
- Financial Conduct Authority-recognised Open Ended Investment Companies (OEICs)
- Bank deposit accounts
- Exchange traded funds
- Real estate investment trusts
Who is a SIPP pension for?
A SIPP can be a great option for retirement savers both at home in the UK and for those who are living as expatriates abroad – for example, in the European Union, Australia or the United States.
A SIPP effectively allows a saver to pool pensions into a single pot, either before or after retirement, so they can later draw income from it.
The greater levels of freedom and flexibility presented by SIPPs make them an ideal retirement saving vehicle for people who like the idea of an actively managed fund which can be utilised to work effectively for them. And, just as with any other pension, SIPP pensions holders are able to access their money from the age of 55, while up to 25% of the fund can be withdrawn as a cash lump sum which would be tax-free to a UK resident.
Furthermore, a SIPP may be ideal for those who match any of the following criteria:
- People with a trusted financial adviser or wealth manager whom they wish to make decisions on their behalf
- Those with a desire to make a broader range of investments
- Those who wish to consolidate multiple pensions
SIPPs are sometimes referred to as "do-it-yourself" pensions, but it is important to remember that investors don't have to make their investment decisions alone. In fact, unless a person is an experienced and proven investor, it's essential to seek advice from a professional and trusted adviser regarding the available options.
The tax advantages of a SIPP pension scheme
SIPPs, as with many other types of pension, are a highly tax-efficient way to save for retirement. They provide up to 45% tax relief on contributions and the fund grows virtually free of tax.
There may also be particular SIPPs tax benefits if you own a commercial property. This is because it is possible to effectively sell premises to the SIPP, thereby releasing funds which you can then reinvest.
Lastly, there are some other tax benefits of SIPPs. A SIPP is simply a type of personal pension but with wider investment powers and, as is the case with all personal pensions, it is now possible to pass on your SIPP fund to nominated beneficiaries on your death. The beneficiaries can then choose to take the whole pension fund as a lump sum, draw a continuing income if an ‘Income Drawdown’ arrangement is in place, purchase an annuity or simply leave it invested. The tax treatment of benefits paid will vary depending on your age at death and other factors such as whether the beneficiary takes a lump sum or chooses to receive an income.
A SIPP can be left to any beneficiary you choose, including a charity, and can even be divided between multiple beneficiaries. If your beneficiary does not withdraw the entire fund before their death it can be passed on again, so you can ensure the fund continues to provide benefit for future recipients.
Types of SIPP
There is more than one type of SIPP and what will work for the individual investor will depend entirely on his or her requirements.
- A full SIPP provides the greatest freedom and flexibility in relation to the variety of possible investment types and is particularly appealing to retirement savers with the largest pension funds (in excess of £150,000). Full SIPPs incur a creation fee, an annual management charge and may sometimes require a minimum monthly contribution.
- A low-cost SIPP also offers a broad degree of investment options, but doesn't allow offshore funds, investment in unquoted shares or property ownership. Lower cost SIPPs are ideal for people with more modest pension pots. Charges are usually reduced and there are no annual management charges.
- A so-called hybrid SIPP is an offering provided by insurance companies. However, unless you have already paid a significant amount of money into the insurer's own funds, there is only very limited control of investment types.
How are SIPP funds managed?
A SIPP pension scheme is typically managed through a secure online account; where you’ll have access to a dashboard that will enable you to buy and sell your investments, should you choose to do so.
Some providers may let you manage your SIPP via phone or postal service, but this may not be possible.
If you’re an expat living overseas, managing your SIPP funds may not be as straightforward compared to if you were residing in the UK.
SIPP fees to consider
Like with any pension scheme, there are several fixed SIPP fees you’ll need to consider, which can differ in price between providers:
- Set up fees
- Ongoing charges – these typically include transaction fees for each time you make an investment transaction
- Annual management fees – not all providers will charge for this, whereas some will have a flat fee, and others will have a percentage
- Exit fees – if you choose to transfer your SIPP to another provider, you’ll have to pay fees on each share you’re moving
- Income drawdown fees – these are fees that are paid each time you withdraw funds from your SIPP pension
Setting up a SIPP
Setting up a SIPP can be carried out in one of two ways: you can either approach a provider directly, or speak to a financial management company such as Blacktower, who can help you to find the best provider, and put together a comprehensive investment strategy.
Once you’ve found your chosen provider, you’ll need to consider the following things before setting up a SIPP:
- Decide which of your current pension funds you’d like to keep, and which ones you’d like to move into your SIPP
- Determine how much of a risk you’re willing to take: Higher risk can mean greater rewards over time, but low risk can be just as much of a gamble, as you may not make any money on your investments
- Identify where you’d like to invest your SIPP funds
- Choose who will manage your SIPP – it could be you, or it could be your financial adviser
How to pay into a SIPP
If you’re earning a wage, you can contribute 100% of your earnings before tax into your SIPP pension scheme, up to a limit of £40,000. If you earn more than £240,000, the amount you’re allowed to contribute is reduced to a £1 for every £2 earnt, until your tax-free limit reaches £4,000.
If you aren’t earning, you can contribute up to £3,600 per tax year, and receive basic tax-rate relief.
When paying into your SIPP, you can either transfer over other pension funds, pay a lump sum, or set up regular contributions.
Taking money out of a SIPP
You are able to take money out of your SIPP once you’ve reached the age of 55 – although many people hold off, as they think this is too early.
If you’d like to receive a large chunk of your pension at once, you can take 25% of it tax-free. You could then choose to buy a flexible income drawdown product, which means that your remaining 75% fund continues to be invested, but you can take it as income when needed. Alternatively, you could buy an annuity, which gives you a guaranteed income for the rest of your life.
If you choose to take the 25% lump sum when taking money out of a SIPP, be aware that whilst it won’t be subject to tax in the UK, it may not be the case for your country of residence, so it’s important to seek advice on this.
How many SIPPs can I have?
You can have multiple SIPPs, but you’ll need to ensure that your accounts don’t exceed your pension’s lifetime allowance (£1.05 million), or annual allowance (£40,000), otherwise you’ll have to pay additional tax charges.
Advantages of multiple SIPP funds
There are several reasons why you may choose to open multiple SIPP funds:
- Get access to different investment types: Whilst SIPPs provide you with the ability to invest in a variety of assets, it’s not always possible to invest in these through one single provider. If you want a broad portfolio, then opening multiple SIPPs with different providers could be the answer.
- Spread the risk: If you spread your investment through a variety of platforms and providers, your risk may be reduced.
Disadvantages of multiple SIPP funds
Before you choose to open multiple SIPPs, it’s important you weigh up the drawbacks too:
- Extra costs: The fees discussed above will be applicable to each of your accounts, which could mean that opening up multiple SIPPs doesn’t make any financial sense.
- Keeping track of your allowances can be more difficult: As your providers won’t know what’s invested elsewhere, you can’t rely on them letting you know when you’re reaching your allowances. This is something you, or your financial adviser will need to do.
- More administration time required: Of course, it takes more time managing multiple SIPPs than just one, so you’ll need to set extra time aside to take care of the administrative side of things.
Things to consider before setting up a SIPP pension
One of the key considerations of opening a SIPP, is that regardless of which country you reside in, all payments and investments must be made in GBP. Therefore, if you withdraw an income from your SIPP whilst living overseas, you’ll need to consider currency fluctuations. This also means that if you pay into your SIPP from abroad and the value of the pound drops, then you’ll actually be investing more into your funds.
It's also important considering that when you choose to draw an income from your SIPP, you’ll be subject to the UK personal allowance; and your income may also be subject to your resident country’s tax.
SIPP pensions advice from Blacktower
The Blacktower Group was formed in 1986 and since then has been providing its clients, both in the UK and abroad, with a bespoke service to help them achieve their investment and retirement investing objectives backed by experienced wealth management.
We want to help you realise your goals. So, whether you are home or abroad, we can help you make a SIPP transfer, or discuss the possibilities of QROPS, QNUPS, defined contribution schemes, and defined benefit pensions. We are based in many locations across Europe and have advisors who speak Spanish, Swedish, Danish, Norwegian, French and Italian, English and more.
Get in touch with us today.