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What is a SIPP?
Below is a quick and easy guide to investing in a SIPP.
If, instead, you want to read my latest news on my progress to early retirement using my SIPP you can read it on my blog page….
A SIPP is a self-invested personal pension.
It is a UK investment vehicle that allows you to have your own choices of investment in a pension wrapper. That means that you can enjoy all the tax benefits associated with a pension plan but also have the flexibility that you would enjoy building your own portfolio of different investment classes.
COSTS
The cost of a SIPP depends very much on what you want to hold in it. If, like me, you want to hold only quoted shares, investment trusts, and Exchange Traded Funds, then a low cost self-select SIPP is probably the best choice. These can cost only a few pounds each month, regardless of how big the portfolio becomes. This means that costs, in percentage terms, can be high for a small portfolio but very small for a large portfolio.
If you want to hold other, more complex, assets in your SIPP then costs will be higher for a more “bespoke” service.
You obviously need to consider the costs of transactions within your SIPP (e.g. dealing commission and stamp duty)
TAX
Your investments will grow tax-free inside the SIPP. This means that there is no Capital Gains Tax to pay when you sell at a profit. Similarly, there is no income tax to pay on dividend income. The other tax benefit is that your contributions are from pre-tax income. This means that the tax man tops up the contribution that you make into your pension. Basic rate tax payers get a 20% top-up. Higher rate tax payers can reclaim a further 20% through their tax return giving a 40% benefit overall.
Tax benefits gets more complicated if you earn over £150,000 or contribute in total more than £1.8m…..but, if this troubles you then you are probably paying an accountant to help you anyway!
OTHER BENEFITS
You can pass on some of your portfolio when you die….yipee! Before that happens you have more control over when you draw down on your investments and when you buy an annuity. The rules are complex and you will need help from a qualified expert at this stage.
WHAT CAN I HOLD IN MY SIPP?
As mentioned above, quoted investments are all that I hold in my SIPP but you can hold a whole bunch of other investments including commercial property (but not buy-to-let houses), business assets, commodities and non-quoted shares. There are also tax problems holding fine wine and art. These other investments are beyond the scope of this introduction to SIPPs.
My opinion is that the range of asset classes covered by Exchange Traded Funds (ETFs) is so extensive that you can just about get exposure to anything that you could possibly need.
OTHER OPTIONS
Other options include not having a pension (not recommended), stakeholder pensions or company pensions. SIPPs give you greater control than the alternatives, but, if you are happy with what you get from company or stakeholder pension plans, than you may not want to bother with a SIPP.
You can have both, with a SIPP complementing, say, a company scheme that only allows you a limited choice of funds. Be careful because you may miss out on employer matching contributions if you decide to go it alone.