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A pension is one of the most tax-efficient ways of saving for retirement.
A Self-Invested Personal Pension (SIPP) is essentially a pension wrapper that is capable of holding investments and providing you with the same tax advantages as other personal pension plans.
Tax benefits will depend on your circumstances
Like all pensions, a SIPP offers up to 50 per cent tax relief on contributions and there is no capital gains tax or further income tax to pay. The tax benefits will depend on your circumstances and tax rules are subject to change by the government.
The maximum SIPP contribution is either £3,600 or 100 per cent of an individual’s income, up to a maximum of £50,000 per annum. It is possible to contribute more than the annual allowance if you have any unused allowances from the previous three tax years.
However, whereas traditional pensions typically limit investment choice to a shorter list of funds, normally run by the pension company’s own fund managers, a SIPP lets you invest in a much wider range of investments.
You can choose from a number of different investments, unlike other traditional pension schemes, giving you control over where your money is invested.
Typically a SIPP will offer a wide range of investment options for those planning for retirement, including the following:
– Equities (both UK and foreign)
– Gilts and other fixed income instruments
– Unit trusts and OEICS
– Funds, including hedge funds
– Investment trusts
– Real estate investment trusts (REITS)
– Commercial property (including offices, shops or factory premises) and land
– Traded endowment policies
Planning for your retirement
This wide range of pension investment options means that planning for your retirement can be done more strategically, enabling the creation of a truly diversified pension investment portfolio and the spreading of risk across a range of asset classes.
One of the major advantages of a SIPP is that you can consolidate other pensions, allowing you to bring together your retirement savings. This simplifies the management of your investment portfolio and makes regular investment reviews easier.
Taking benefits from your SIPP
When you reach the age of 55 you can take benefits from your SIPP. Traditionally, you would take 25 per cent of the value of the fund and use the remaining 75 per cent to purchase a pension annuity. The annuity provides an income for the rest of your life but, once you have purchased it, you lose access to your pension fund.
Drawdown provides you with an income and still leaves you with access to your pension. The funds remain invested, so you’re still in control of your investments but there is a risk that if the income being taken is combined with poor investment performance, then the fund will decline and so will the income you can draw from it.
No minimum income requirement
The maximum income that can be taken is
100 per cent of the equivalent pension annuity; there is no minimum income requirement so it can be set at zero. On your death it can be used to fund an income for your dependants or be paid out as a lump sum (less a 55 per cent tax charge) to a nominated beneficiary.
This level of choice can be expensive to offer and many people find that they do not need it, so lower-cost SIPPs have been developed that focus on investment funds only. These lower-cost SIPPs usually offer significantly more fund options than you would be offered in a traditional pension scheme.
Monitoring your investments
Some of the investments you choose will carry a certain amount of risk. You will be solely responsible for any investments and you will not receive additional help. The option is available to get some help, but this will incur additional costs.
Being solely responsible for your investment will require you monitoring your investments, and possibly checking on them regularly. A SIPP investment, like any investment, is never guaranteed and you should obtain professional advice.
All figures relate to the 2012/13 tax year. A pension is a long-term investment, and the fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.