In the past year, due to pensions reform, the UK pensions market has undergone radical change and savers will have more autonomy and more choices now than ever before after 6th April 2015.
Whilst this is undoubtedly a positive development for many, it also means that savers need to be better informed than ever before about the benefits and potential downsides of different types of pension.
The Self Invested Personal Pension (SIPP) gives the saver control over their investment choices and this blog will explore what investors can gain from them.
Traditionally, pensions were policies sold by and managed by large providers.
Pensions would tend to invest in funds managed by the pension company meaning that the policy holder is limited in their investment choices.
A SIPP is quite different. It is a DIY flexible pensions policy that enables the holder to invest in a wide range of choices, with the shares held in a ‘pensions wrapper’. The investments that a SIPP owner can buy have to be approved by HMRC.
Who might benefit from a SIPP policy?
Pension companies are paid for their ability (in theory) to maximise the return on investments and minimise risk. However, there are individual investors often understand how to profit from investing already.
If you already understand investing, are happy to do your homework and work out what investment opportunities suit your needs then a self invested pension might well be a good opportunity for you.
However, as any seasoned investor knows, the value of investments can go up, but it can also go down.
Stepping out on your own can be liberating but at the end of the day any poor investment decision made by you will see your fund decline in value.
What do I do with my SIPP?
You can put a variety of different types of investments into your SIPP, so choosing a mixture of low, medium and higher risk stocks, shares and bonds (among other investments).
One of the advantages of a SIPP is the government tax relief you will receive when making an investment. If your personal rate of income tax is 20 percent, this is the rate of tax relief that will be applied to your SIPP.
Therefore, if you invest £8,000 in a SIPP, the government will assume that, without the 20 percent tax that would normally be levied on your earnings, you would have had £10,000 to invest. The government will then top your SIPP up by £2,000 to £10,000.
If you are earning a wage you can invest up to 100 percent of your wages (up to £40,000 in the 2014-2015 tax year). If you are unwaged you can contribute up to £3,600 per year and still access tax relief.
What else do I need to look out for?
In order to open one through an investment firm, you will be looking at setting up fees.
You might find that some SIPPs don’t charge an annual fee, but others will charge anything between 0.5 percent and one percent of the total value of your investments per annum.
Therefore on a £100,000 pot you could wind up spending £1,000 a year in fees.
In addition to this, you as an investor are responsible for the cost of your own trades, which might be anywhere between £10-£15 a time.
Before you commit yourself to any investment you should talk through your needs and priorities with a professional financial advisor who is an expert in the field.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED