Is a self invested personal pension right for you?

Posted on: 14-04-2021 in Pensions

A personal pension is a crucial part of any retirement planning strategy. If you are reading this, chances are you will have a workplace pension or a private pension, maybe a combination of the two. The issue with most pension products is they tend to lack flexibility and clarity. Most products will allow you to choose from a broad range of investment areas, but that is about it. From there, the pension fund manager will do their magic, and you will likely put your retirement fund to the back of your mind. But what if you want more control over your personal pension?  For those looking for a hands-on approach with their pension investments, there are self invested personal pensions – otherwise known as SIPPs. 

What is a SIPP?

A SIPP is a pension ‘wrapper’. What this means is, a SIPP holds investments until you retire or start to draw an income, just like a standard personal pension. What separates a SIPP from other personal pensions is the control you have over them. Think of a SIPP as a do-it-yourself pension product. You manage all of the investments yourself and make the decisions rather than a fund manager. The assets that a SIPP can hold depends on the type of SIPP and the provider. Some of the common assets which are permitted include:

• Unit trusts
• Investment trusts
• Government securities such as bonds
• Traded endowment policies
• Insurance company funds
• Certain National Savings and Investment (NS&I) products
• Commercial property (shops, factories etc.)
• Stocks and shares

Residential property can’t be held in a SIPP directly. According to the Money Advice Service, residential property can be held in a SIPP in some circumstances. For example, if the property is part of a real estate investment trust. The UK government introduced new rules in 2015, giving you more flexibility in accessing your pension. SIPPs, like other types of personal pension, can be accessed from the age of 55.

The benefits

Like other personal pension products, SIPPs offer some fantastic tax benefits. Not only that, a SIPP is ideal for those looking to consolidate all of their pensions into one place, making them easier to manage. Up to 25% of your SIPP can be withdrawn tax-free. You also get tax relief on all contributions up to the value of 100% of your yearly salary. You should note that tax relief caps out at £40,000 per tax year. As previously mentioned, another huge benefit of a SIPP is the flexibility they provide in terms of investment options versus a standard personal pension. Although a SIPP provides more flexibility, there are some things to consider.  

Costs and experience

Because of how SIPPs work, they tend to be better suited to those who are comfortable with investing.  Remember, you choose where your money is invested and how much risk you are willing to take. That doesn’t mean a lack of investment experience should put you off a SIPP. Some people will hire a financial adviser who will look after the SIPP and manage the investments. However, this brings us on to another consideration – costs. If you have a large pension pot, the costs of hiring an expert may be well worth the money. For those with a smaller pension, the additional fees may not be as easy to justify. Besides the management fees, there are some fixed costs to factor in. The fees will all depend on the type of SIPP and the provider. Some of the typical costs you can expect are:

• Set up fees
• Transaction fees for each investment
• Admin and platform fees

When it comes to SIPPs for expats, there are some other things to consider. 

SIPPs for expats

As an expat, your first consideration will revolve around currency. SIPPs are held in the UK, meaning that all transactions will be in GBP. If you plan on drawing a retirement income abroad, you need to factor in currency fluctuations and exchange rates. Because SIPPs are held in the UK, they follow the same rules as any other UK-based personal pension set out by the government.  Whether you live in the UK or not, the same tax rules apply. However, if you no longer live in the UK, your retirement income could be subject to tax in your new country of residence. For expats, this could see them being taxed twice.  It’s essential that you understand the local tax rules before choosing a SIPP as your pension product of choice.

Next steps

When it comes to personal pension products, the market has something for everyone. It’s about finding the right product that meets your retirement goals and fits your situation. If a SIPP sounds like the right option for you, speak to a professional first. A qualified financial adviser can help you make informed decisions and answer any questions you may have regarding SIPPs. Not comfortable managing your investments or simply don’t want the hassle? Not to worry, a financial adviser can take care of that for you. At Holborn, we have been working with expats for more than 20 years to reach their retirement goals. Our team are pension and investment specialists, so you can be sure that your SIPP is in good hands. To find out how we can help you, contact us using the form below.