Ten tips to make the most of a Self-Invested Personal Pension (SIPP) and other personal pensions.
Why not do-it-yourself?
A SIPP can be used to gain tax relief on a wide range of assets – including bank deposits, bonds, shares, pooled funds such as unit and investment trusts, Open-Ended Investment Companies (Oeics), Exchange Traded Funds (ETFs), commercial property, hedge funds, foreign currency and warrants. SIPPs have to be administered by an authorised provider to gain tax relief from HM Revenue & Customs but you decide what it buys and sells and when.
How does a SIPP gain tax relief?
Exactly like any other pension. Everyone – including children and non-earning spouses – can gain basic rate relief on payments into a SIPP. So £80 paid in will boost the value of the fund by £100 before costs. High earners can obtain more relief when they complete their tax returns, subject to various limits. A quarter of the value of your SIPP can be taken as tax-free cash to spend on anything you like after you reach 55 years of age.
What happens to the rest of my savings?
Here’s where SIPPs can prove particularly attractive. You are no longer required to spend at least three quarters of your fund on an annuity or guaranteed income for life when you retire and the Government has proposed removing the remaining tax penalties on pensions which continue to be invested after the saver reaches 75 years of age. So, savers can manage their own SIPP to meet their changing individual needs. For example, after retirement you might hold high-yielding bonds, shares and funds to deliver an income without relinquishing ownership or control of their capital.
Where’s the rub?
When things go wrong, you will see the person responsible in the mirror every morning. Stock market prices can and do fall without warning. When this hits the value of your SIPP, you won’t be able to blame some twit in a stripey shirt.
What do you want?
Beware that not all SIPPs are the same. Some – including those provided by Aegon, AJ Bell, Hornbuckle Mitchell, Legal & General, Rensburg Sheppard and Standard Life – offer the full range of 15 core investment options. Others – including Hargreaves Lansdown and Alliance Trust, which manage my Sipps – only offer a restricted choice; for example, Hargreaves does not allow investment in commercial property, offshore bonds or foreign currency.
Will I have to go it alone?
No. Some SIPP providers – including AWD Chase de Vere, Friends Provident, Jupiter, LV=, Rathbone and Suffolk Life – offer discretionary fund management as an option, so a professional can pick stocks and shares for you; subject to the terms of your agreement.
How much do you want to spend?
Lower costs can compensate for restricted choice, depending on your individual needs. For example, Hargreaves Lansdown imposes no initial fee, no annual management charge, nor fees on transfers in from other funds – although it does levy a £75 fixed fee on transfers out.
What’s not to like?
Sipps will not suit people who do not wish to take any interest in or responsibility for their retirement savings. Cheaper options, such Stakeholder Pensions might prove more appropriate.
Will my employer pay into my SIPP?
Almost certainly not – which is why it makes sense to join company or occupational schemes that benefit from employer contributions. Doing anything else is akin to asking for a pay cut. You can have SIPPs and company pensions at the same time.
When would be a good time to set up a SIPP?
Like growing asparagus, you should always have started saving and investing five years ago. The sooner you get going, the longer compound interest has to work in your favour.
Source : The Telegraph
By Ian Cowie