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Self-Invested Pension Plans (SIPPs)

If you're looking to get the most out of your pension, you might consider a SIPP fund. Highly tax-efficient, here's what you need to know about SIPPs

SIPPs advice

For many of us, the day when we can finally retire and enjoy our hard-earned leisure years cannot come soon enough. This is what makes having a carefully managed and well-invested pension plan so important.

Of course, you certainly shouldn’t be waiting till your later years to start investing in your pension fund, but you also don’t want to be overly taxed for your carefully saved finances.

This is where SIPP funds come in. Designed to give you more freedom in how you invest your pension for a greater return on investment, a SIPP pension scheme can help you boost your total pension and save you money on tax.

To see if a SIPP plan is right for you, here is everything need to know about them, including their benefits.

What is a SIPP?

SIPPs, also known as Self-Invested Personal Pension plans or “do-it-yourself” pensions, are ideal for those looking for a tax-efficient way to save for retirement.

They’re designed to give you a much greater degree of autonomy than more common pension plans, such as defined benefit or defined contribution pensions, by enabling you to decide where exactly you want to invest your pension money.

Thanks to this wider range of investment powers, a SIPP pension scheme enables investors to consider traditional pension investment options, alongside any of the following areas, for their pension funds:

  • 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

On top of this, SIPP pension rules actually allow you to transfer existing pensions into one pot. This versatility makes investments in them a good choice for anyone who prefers the idea of a single, actively managed fund, which can be utilised to work effectively for them.

However, it’s 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 – such as our team here at Blacktower.

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Who is a SIPP pension for?

This type of pension is a great option for retirement savers, both at home in the UK or living as an expatriate abroad, but they’re also available for use by anyone below the age of 75. In most cases they’re ideal for anyone who matches the following criteria:

  • People with a trusted financial adviser or wealth manager whom they wish to make financial decisions on their behalf.
  • Those with a desire to make a broader range of investments in order to get the most out of their pension.
  • Those who wish to consolidate multiple pensions into one easy-to-access pot for when they eventually retire.

What are the different types of SIPP?

When it comes to SIPP investments, there are three varieties for you to choose from. Each provides different options and what will work for the individual investor will depend entirely on his or her requirements:

  • Full SIPPs – The standard option for most investors, this model provides the greatest freedom and flexibility in relation to the variety of possible investment types. It can be particularly appealing to retirement savers with large pension funds (those in excess of £150,000), however, full SIPPs do incur a creation fee, an annual management charge, and may sometimes require you to make a minimum monthly contribution.
  • Low-cost SIPPs – While still offering a broad degree of investment options, this low-cost alternative doesn’t allow for investment into offshore funds, unquoted shares, or property ownership. Lower-cost SIPPs are ideal for people with more modest pension pots, and unlike the first type, their charges are usually reduced, often with no annual management charges at all.
  • Hybrid SIPPs – This last option is most commonly offered by insurance companies and comes with many of the same previously mentioned benefits. However, this type requires you to have paid a significant amount of money into the insurer’s own funds in order to expand your investment options, otherwise, you will only be granted very limited control of the investment types you choose.

What are the advantages of a SIPP pension scheme?

SIPP funds, as with many other types of pension, are a highly tax-efficient way to save for retirement. They’re entirely free of UK income and capital gains tax, and in many cases, a Self-Invested Pension Plan can provide up to 45% tax relief on contributions up to £40,000.

On top of this, you may also find yourself able to take advantage of other tax benefits if you own commercial property. This is because it’s possible to effectively sell premises to your SIPP, thereby releasing funds which can then be reinvested.

Lastly, it’s now possible to pass on your fund to nominated beneficiaries in the unfortunate event of your death. These beneficiaries can 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 also 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, however, SIPP pension rules state that in many cases they may be immune inheritance tax.

A SIPP can be left to any beneficiary you choose, including a charity, and can even be divided between multiple beneficiaries. And 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 benefits for future recipients.

However, one of the key considerations of opening this type of pension fund 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 fund whilst living overseas, you’ll need to consider currency fluctuations. This also means that if you pay into your fund from abroad and the value of the pound drops, then you’ll actually be investing more into your pension.

Finally, it’s also important to consider that when you choose to draw any income from your fund while living abroad, you may very well be subject to the UK lifetime allowance limit as well as the tax laws of that country.

How to set up a SIPP

When it comes to setting up your Self-Invested Pension Plan, the process can be carried out in one of two ways:

  • You can approach any SIPP providers directly and ask to open a pension through their process.
  • You can speak directly to a financial management company, such as Blacktower, who can help you to find the best provider and put together a comprehensive investment strategy that best suits your needs.

Regardless of which option you choose, once you’ve found your chosen provider, you’ll need to consider the following things before setting up your fund:

  • Decide which of your current pension funds you’d like to keep, and which ones you’d like to move into your SIPP. (It’s important to bear in mind that some pensions are better suited to remaining independent).
  • Determine how much of a risk you’re willing to take. Higher risk investments can mean greater rewards over time, but low risk investments can be just as much of a gamble, as you may not make any money for your pension.
  • Identify where you’d like to invest your SIPP funds.
  • Choose who will manage your pension – it could be you, or it could be your financial adviser.

How to pay into a SIPP

As with standard pensions, paying into a SIPP is relatively easy; you can either transfer over other pension funds, pay in a lump sum, or set up regular contributions. You can even do all three if you prefer.

Besides this, 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. But if you earn more than £240,000, the amount you’re allowed to contribute will be reduced to £1 for every £2 earnt, until your tax-free limit reaches £4,000.

Lastly, if you aren’t earning, you can still contribute up to £3,600 per tax year while still receiving basic tax-rate relief.

How do you take money out of a SIPP?

Anyone who owns a SIPP will be able to withdraw money once they reach the age of 55 – although many people hold off, as they think this is too early.

Withdrawing this money is relatively simple. If you’d like to receive a large chunk of your pension at once, you can withdraw 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.

However, if you do choose to take the 25% lump sum when taking money out of a SIPP, be aware that whilst it might not be subject to tax in the UK, it may not be the same case for your country of residence, so it’s important to seek advice on this.

How are SIPP funds managed?

A SIPP pension scheme is typically managed through a secure online account that gives you access to a dashboard that enables you to buy and sell your investments, should you choose to do so. Some SIPP providers may also let you manage it via phone or postal service, but this may not be possible in many cases.

If you’re an expat living overseas, managing your fund may not be as straightforward compared to if you were residing in the UK, and unless you’re an expert in financial investment, it’s always best to hire a fund manager to take over the maintenance of your investments.

SIPP fees to consider

Like with any pension scheme, there are several fixed SIPP fees you’ll need to consider before deciding if it’s the right type of fund for you. These fees can include all or some of the following, and will likely differ in price between providers:

  • Set up fees – Fees related to the setup of your fund.
  • Ongoing charges – These typically include transaction fees 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 pension 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 pension.

How many SIPPs can I have?

There is no precise limit on the number of SIPPs you can have, but you’ll need to ensure that your accounts don’t exceed your pension’s lifetime allowance of £1.06 million or your annual allowance of £40,000, otherwise, you’ll have to pay additional tax charges.

What are the advantages and disadvantages of multiple SIPP funds?

There are several advantages opening up multiple funds, including:

  • Different investment types – Whilst this type of pension plan provides 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 funds with different providers could be the answer.
  • Spread the risk – If you spread your investment through a variety of platforms and providers, your risk of losing money may be reduced.

On the other hand, having multiple funds does come with drawbacks:

  • Extra costs – Each fund will come with its own set of fees, increasing the financial burden on your accounts.
  • Allowance tracking difficulties – As your providers won’t know what’s invested elsewhere, you can’t rely on them letting you know when you’ve reached your allowances. This is something you or your financial adviser will need to manage.
  • More administration time required – It takes more time to manage multiple funds compared to just one, so you’ll need to set extra time aside to take care of the administrative side of things.

Whether or not a SIPP is right for you will come down to your own financial situation, but they’re certainly well-suited to those who understand the financial market or have the time to research and manage their investments.

However, it’s important to remember that investments will fall and rise, so you need to be prepared for the financial risks if something goes wrong.

Of course, if you choose to seek help from Blacktower, our team of advisors will do their best to mitigate this risk.

Here at Blacktower, we’re experts in helping our customers get the most out of their finances, both at home and abroad. Get in touch today to see what SIPPs advice we can offer or reach out to us for advice on both QROP pensions and QNUPs for those living elsewhere as an expat.

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This communication is for informational purposes only, based on our understanding of current legislation and practices which is subject to change and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

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