By: Susan Wade
Self-invested personal pensions (SIPPs) are a topic that many people misunderstand, but the concept of them is actually a rather simple one: essentially, a SIPP is a pension 'wrapper' that holds your investments until you retire. They work in a very similar way to standard personal pensions, with the main difference coming down to the increased flexibility that they offer the pension holder.
How SIPPs Work
SIPPs may not be hard to understand, but that doesn’t mean that they're suitable for everyone. Although their popularity has grown tenfold over the last decade, they're suited to a very specific type of person.
A standard personal pension scheme is created to suit almost everyone. It usually takes the form of a pooled fund, and an experienced professional manages your investments on your behalf.
SIPPs are different, in that they offer you far more choice with regards to where your pension fund is invested. This power can reside either in your own hands, or in the hands of an authorized investment manager appointed by you, who invests with your specific needs and goals in mind. This increased control is the SIPPs defining trait, and it makes them much better suited to some people than others; specifically, to those who have investment experience.
This added flexibility is usually something that you have to pay more for. Charges tend to be higher than they are for other personal pensions and stakeholder pensions, meaning that SIPPs are rarely a cost-effective option for those with a low or average fund.
What You Can Invest In
SIPPs tend to be far more flexible with regards to the range of assets you can invest in, although the various providers set the specific options made available to individual investors.
Usually, these offerings will include:
• Individual stocks and shares
• Government securities
• Unit trusts
• Investment trusts
• Insurance company funds
• Traded endowment policies
• Deposit accounts with banks and building societies
• National savings products
• Commercial property (e.g. offices, shops, factory premises)
How an Income is Provided
Under government proposals that are set to come into effect next month, individuals who invest in SIPPs will be able to access and use their pension pot in any way that they wish from the age of 55. This will mean that they can take up to 25 per cent of the total tax-free, a boon that can amount to a significant sum of money. The remaining 75 per cent can be converted into an annuity to provide a regular retirement income, or withdrawn either in stages, or as a single lump sum that is subject to tax at the investor's highest rate.
Could a SIPP provide a viable pension option for your retirement?
Susan is an experienced finance blogger with forex as her forte. Her flair for financial topics is best reflected by her posts on social trading. She herself is a big advocator of social trading which gives traders an opportunity to take their power of analysis several notches higher