The Self-Invested Personal Pension (SIPP) was first introduced over 30 years ago and large numbers of investors have opted for one since. Their greater flexibility and the amount of control they offer has led to them being branded ‘DIY pensions’ in some quarters.
If you’re confident about investing in the stock market and have a sizeable pension fund, or you’re looking to use a pension product to invest in commercial property, then a SIPP may well be the right option for you.
But they’re not for everyone. Greater control means greater responsibility and a potentially increased risk.
What is a SIPP?
A SIPP is a Self-Invested Personal Pension, open to anyone who meets the eligibility requirements of their chosen SIPP provider.
A minimum fund size may apply, and this might be comparatively high. This is because the costs of administering a SIPP can be larger than for a standard personal pension, due in part to the flexibility and control a SIPP offers.
A SIPP can give you greater control because you can choose from a wider range of investment options but you can also opt for a managed portfolio, based on your risk profile.
You can also use a SIPP to invest in commercial property.
Still, a SIPP is unlikely to be right for first-time or beginner investors.
Why might you choose a SIPP?
SIPPS can be a great investment choice in some circumstances and for a certain type of investor. You might choose to open a SIPP if:
- You have experience of investing
A SIPP gives you control over the investments you choose but this means greater responsibility too.
You’ll likely have complete flexibility and control over your investment portfolio, with a wide range of funds to choose from and different asset classes available.
This might increase the potential for investment growth but also means you’ll need to have a very definite understanding of your attitude to risk.
Your SIPP provider might offer a range of bespoke portfolios, tailored to different risk profiles.
- Your pension fund is large or you intend to invest a large amount
SIPPs can be more ‘hands-on’ for both you and your SIPP provider. This can lead to higher charges than with other pension products.
If your pot is large, you may be able to soak up these additional costs (your SIPP provider may have a limit on the minimum investment). Even if your initial investment is low, if you intend to significantly increase contributions once the SIPP is in place, this may offset the charges.
- You’re looking to hold commercial property in your SIPP
Commercial property could include business premises, factories or offices, and there are two main ways that these can be held in a SIPP.
- Use your pension fund to purchase the property, placing the premises directly in the SIPP
- If your business already owns the property, it can be sold to your SIPP to release cash back to the company. Placing the premises into your SIPP effectively exchanges the pension fund already accumulated for the property itself. This approach is considered extremely high risk and will only be appropriate in limited circumstances.
Holding commercial property in a SIPP has benefits, including:
- The rent you receive is paid directly into the SIPP, rather than counting as personal income, and therefore isn’t liable to Income Tax
- You won’t pay any Capital Gains Tax on the sale of the property – because the property is held in the SIPP and any gains belong to the pension
- You can also use up to 50% of the SIPP value as a loan to purchase your commercial property, held against the value of the SIPP. Your personal (and professional) finances are protected if the property is repossessed.
When wouldn’t you choose a SIPP?
A SIPP isn’t a mass-market product but was instead intended for a very selective market. Its move into the mass-market has led to some people being invested in SIPPS who shouldn’t be – paying higher fees when they would be better off in a personal pension.
Consider an alternative to a SIPP if:
- Your pension pot is relatively small
SIPPs can have high charges compared to other pension products. Whereas a high fund value can help to soak up these charges, if you have a relatively small fund, you could see a large portion of it eaten up.
Consider whether other pension products might be right for you and if you’re still unsure, speak to us.
- You are a first-time, or relatively inexperienced, investor
SIPPs are complex products that offer a lot of choices.
They also offer the potential for increased risk. Although they might be suitable for experienced investors, consider other products if you are new to investing or still relatively inexperienced.
- You are risk-averse
The control and flexibility that SIPPs offer is great if you’re an experienced investor, but less so if you are new to investing. If you are risk-averse there are other pension products available – get in touch with us if you’d like to discuss your investment options.