SIPPs (Self Invested Personal Pension) are an alternative to the traditional pension schemes we generally think of and are known in some circles as the Rolls Royce of pensions compared to the everyday common place stakeholder/state pension.

SIPPs are becoming more popular amongst investors, with Standard Life reporting a 38% increase during the first half of 2011, as new government legislation lowers the entry amount; and as individuals become more financially savvy about their money and the state of their pension(s).

Originally created in the early Nineties to cater for extremely wealthy savers with pension funds over £200,000, the reason for the’ Rolls Royce’ term, in recent years those who have no source of income can contribute up to £3,600 a year into a SIPP.

SIPPs are most beneficial to those who have a number of pension schemes and want to bring these retirement plans, plus any investments together in one easily manageable pension wrapper. A SIPP may also be appropriate if you are self-employed or if you’re current employer does not have a pension scheme.

Additionally SIPPs will also be of benefit if you are looking for; increased freedom to invest in a wider range of investment options, more flexibility on when you start to draw your pension and how you choose to take this income and finally a far greater choice of pension benefits for your dependants or spouse when you die.

With a SIPP a 25% income tax free lump sum is able to be withdrawn and the remainder is available to buy an annuity. As with all pensions, the money cannot be withdrawn until age 55. Simple and inexpensive ‘low-cost’ SIPP have opened the market to middle-income investors looking to boost returns by going it alone.

One of the key differences between a SIPP and a Stakeholder pension is even though they are both classed as Personal Pension Plans and have the same rules regarding tax relief and contributions stakeholder pensions are more basic. They generally can accept payments of as little as £20pm and investment choices are limited to about 20 funds managed by the pension provider; whereas SIPPs offer a far more extensive list of investments and greater flexibility and control. Investments are not limited to funds and also include, but this is not limited by, shares, bonds, gilts, investment trusts, cash and commercial property. As such each SIPP is different reflecting each individual’s short and long-term financial goals and needs as well as circumstances.

Set up fees and annual charges vary depending on the SIPP Provider but can start around the £250/£350 region.

5 Great Things About a SIPP?

• Gives you a sense of autonomy and control over your financial future
• The choice of vehicles to put in your SIPP wrapper is extensive, and  can included products such as Carbon Credits, Rare Earth Metals, Precious Metals aka investment Gold!!!

• Funds go to your beneficiaries on death rather than the government, Pension Company and/or your employers.
• Tax benefits similar to any personal pension plan.
• Can borrow up to 50% of the net value of the pension fund to invest in any assets, although in practice SIPP trustees are only likely to permit this for commercial property purchase.

5 Thinks NOT So Great about a SIPP?

• You are willing to accept a higher level of investment risk
  • You are willing to accept a higher level of charges depending on the type of SIPP you go for; there are three types: Deferred, Hybrid and Pure or Full.
  • You could lose some benefits such as Guaranteed Annuity Rates or cover for life assurance if you choose to transfer out of your current pension fund
  • You have to be prepared to do the homework and regularly monitor your investment
  • You have to be confident as well as comfortable to stand by your own investment decisions – good or bad!

Conclusion

When looking at a SIPP you obviously need to look at how it will fit into your long term financial planning goal; as such its suffice to say that you need to do your due diligence in the VEHICLE in which you wish you use for your SIPP – remember you can use multiple; as well as not put all your money in one basket (if possible) and of course get some advice – which is ultimately someone else’s opinion rather than fact! As I always advocate YOU should be your own best financial advisor as it is your money not an IFA; a SIPP allows you to do that.

Finally, take this into consideration this scenario, if you have a pension fund worth £30k which if crystallised today would give maybe £7,500 or less tax free then approx £20 a week. Firstly, who can live on this? Secondly, what normal fund can increase this up to a liveable level in 10 – 15 years with sensible but frequent contributions? What then is the real risk of, at a minimum, considering the range of vehicles a SIPP wrapper offers? Especially if you look at how many pension funds are currently negative or even negligible i.e. do not have enough money to pay out.

So on that note, isn’t it time that you become financially savvy about (your) pensions, and in particular SIPPs? If yes, then get in-touch by sending an email to info@butterflywealthcreation.com to arrange a FREE Pension review.

To your financial success and becoming financially savvy!

P.S. If this article interests you then do check out my vlog on Gold, Pension and ISAs.