Many of us are realising that in order to have the lives we want in retirement, we need to manage our pensions ourselves.
SIPPs – self-invested personal pensions – used to be for those on high incomes. Today, however, they are becoming more popular for those with even modest incomes. Oliver Temple answers common questions about SIPPs.
1) What exactly are SIPPs?
Simply they are a way of allowing you to put different types of investments into ‘one pot’. You can make investment decision yourself if you wish. Money is paid in before income tax is taken off.
2) What investments can be included?
Typically a workplace pension might only include stocks, shares and a few mutual funds. SIPPs can include a larger selection of investments such as:
• Cash Shares
• Exchange traded funds (ETF)
• Unit trusts and Open Ended Investment Companies (OEICs)
• Gilts and corporate bonds
• Investment trusts
3) How much can be contributed to a SIPP annually?
You can pay as much into your pension as you earn each year – normally up to a maximum of £40,000 (known as your annual allowance).
4) Can I borrow my SIPPs ‘loan money’?
Yes, SIPPs can loan money to investors so money from your SIPP could be used to establish a mortgage on a piece of property. The property would then be legally owned by the SIPP and through rental you would ‘repay’ the mortgage.
5) What about pension freedoms?
A SIPP is eligible for all of the same freedoms as contribution workplace pensions. It means that funds beginning at the age of 55 with minimal tax liabilities can be accessed. Subject to suitability, you can enter drawdown contracts, transfer pensions, purchase annuities, take cash lump sums etc.
6) Are SIPPs riskier than stakeholder pensions’ workplace?
There is no such thing as a risk-free investment – every form of pension investing comes with its associated risks. SIPP needs a basic understanding of investing but it is well worth learning the details in order to control your pension savings.
7) How does one set up a SIPP?
SIPPs are typically offered through specialist providers who only do this one thing. To begin with the investor contacts the pension provider and makes arrangements to establish a pension account.
Gold Investments can recommend SIPPs providers to you. To set up a SIPP is a relatively straight-forward process and easy as filling out the associated paperwork and making the first contribution.
8) Who makes the investment decisions?
It all depends on factors such as your age, any other provision you have made for retirement and your appetite for risk.
9) Do SIPPs qualify for pension freedom?
A SIPP is a defined contribution scheme in every sense of the definition. As such, it is eligible for all of the same freedoms afforded defined contribution workplace pensions.
That means members can begin accessing their funds with minimal tax liabilities from the age of 55. Investors can transfer their pensions, take cash lump sums, enter drawdown contracts, purchase annuities, or just continue on the path of investment.
10) Can an investor borrow from his/her SIPP?
SIPPs have a unique benefit to them that members of stakeholder and workplace pensions do not enjoy: they can loan money to investors. In other words, you could use money from your SIPP to establish a mortgage on a piece of property.
The property would then be legally owned by the SIPP, and you would ‘repay’ the mortgage through rental payments made to your pension. This is one of the ways investors use their pensions to purchase commercial rental property.
11) How do I get the tax relief?
If you are a basic-rate taxpayer, the Sipp company will reclaim the tax relief on your behalf and you do not need to do anything.
But if you pay a higher rate of tax, the pension will still claim only basic-rate relief, so you will need to claim the rest yourself via your self-assessment tax return. This will come to you, rather than being paid into your pension. You may want to bear this in mind when you decide how much money to send to the pension firm.
Thinking about SIPPs and physical gold as part of your portfolio? Talk to us:
Gold Investments Limited
88 Gracechurch Street
London EC3V 0DN
Tel: 020 7283 7752
Fax: 020 7283 7754
Please note that these our own views only and is not legal advice. Gold Investments is not a SIPP provider but works closely with trusted pension providers. We would be happy to put you in touch with them.