There’s nothing particularly glamorous about choosing a pension plan. Compared to stocks, shares, CFDs, property and the range of other investment products on the market, a pension is undoubtedly one of the less alluring options. However, this type of savings plan remains essential for anyone hoping to eventually retire and live out their senior years in comfort.
Whilst many tend to view pensions as a necessary – yet relatively uninspiring – investment, it’s worth considering a Self Invested Personal Pension (SIPP) before choosing the typical, standard pension plan. Here’s a brief guide to how SIPPs work, and why they may be the best choice for you:
How is a SIPP different from a standard pension?
A SIPP functions in very much the same way as a typical pension. Funds are taken from your monthly salary and invested toward your retirement savings instead. The difference, however, is in how those funds are invested.
With a standard pension, the way that your money is invested is up to the pension provider. You pick from a list of pension plans and then hand over the reigns to someone else. With a SIPP, however, you get to choose how your pension funds are invested. You, or your IFA (independent financial adviser) can choose to invest your retirement savings in a range of financial products, including: commercial property, investment trusts, unit trusts, insurance company funds, government securities and individual stocks and shares.
What are the benefits of SIPPs?
If you’re an experienced investor (or if you work with an IFA who is), a SIPP allows you to benefit from greater returns on your pension investments. Assuming you make wise investment decisions, there’s more to gain by taking calculated risks than by handing over control of your pension to someone else.
Another major benefit of SIPPs is that they’re incredibly tax-efficient. Certain individuals may benefit from as much as 45% less tax on pension contributions. All SIPPs are exempt from Capital Gains Tax, Income Tax and Inheritance Tax (should you die before collecting your pension).
What are the disadvantages of SIPPs?
The main disadvantage of a SIPP over a standard pension is that, whilst there’s more to gain, there’s also far more to lose. For inexperienced investors, SIPPs can be risky. It’s only beneficial to choose this ‘DIY’ route if you’re confident that you’ll make rewarding investment decisions.
Who do SIPPs work best for?
The best candidates for SIPPs are those who already have an existing pension fund and also fall into a higher tax bracket. You must also be willing and able to pay larger monthly pension contributions, as well a slightly more in charges, than a standard pension holder. Finally, it helps if you’re an experienced investor or are confident in the abilities of your financial adviser.
Essentially, SIPPs are designed to benefit those who can afford to take more calculated risks in the way they invest their pension contributions. If you think you might belong to this group, it’s certainly worth speaking with a professional financial adviser to find out more about the many investment opportunities available with SIPPs.
Image by Paul Whippey, used under Creative Comms license