Self Invested Personal Pensions Sipps

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    Self-Invested-Personal-Pensions-SIPPS

    A self-invested personal pension plan (or SIPP) is a flexible type of personal pension. Unlike a personal pension where the fund managers oversee and control investments, a SIPP allows its member much greater flexibility regarding where and how their pension pot is invested.

    A SIPP can be a good option for individuals who have the knowledge, confidence and time to manage the investments in their pension fund.

    The majority of SIPPs are established under a trust, with the trustee company controlled by the pension provider. Each member of the SIPP trust has a separate plan within the trust and instructs the trustees to carry out the investment transactions of their pension fund. However, it is possible for the holder to be a trustee with an approved administrator carrying out their investment transactions.

    With a SIPP, the member takes on the responsibilities of a fund manager, deciding where and how to invest their pension pot. This flexibility and greater control over investments is one reason why SIPPs have become so popular.

    Upon retirement the assets built up in a SIPP can be used to buy an annuity, with the member able to take a tax free lump sum of up to 25% of the total pension pot. Alternatively, SIPP members can opt for Alternative Secured Income, which allows them to continue to keep their pension pot invested and drawdown income from their fund.

    General rules for SIPPs

    Generally, the rules governing pension contributions [link], tax relief [link] and eligibility are the same with a SIPP as with any other type of personal pension in the UK.

    To take out a SIPP you must be resident in the UK and less than 75.
    Members will generally receive tax relief at the highest rate(s) they pay, although this will change in 2011 for those with annual earnings of £150,000 or more.
    The maximum annual contribution limit qualifying for receive tax relief now stands at £255,000.You can contribute more to a SIPP, but your contributions will not receive tax relief.

    After April 2016 you can take the benefits built up in a SIPP, including a tax free lump sum, from the age of 55.

    Investment options with SIPPs

    The main attraction of a SIPP is the flexibility it provides and the wide variety of investments that can be made with this pension plan. Approved investment options for SIPPs includes:

    Stocks and shares from recognised UK or overseas stock market,
    Government gilts,
    Bonds,
    Units trusts and investment trusts,
    Cash and deposit accounts, and
    Commercial property (and borrowing up to 50% of your pension pot to invest in commercial property).

    You can also invest in residential property and gold bullion, although you will be subject to 55% capital gains tax.

    Investments that cannot be used with a SIPP include Premiums Bonds and ISAs.

    Advantages and Disadvantages a SIPP

    Advantages:

    As with all personal pensions, tax relief is an obvious advantage with a SIPP.

    A SIPP gives its members much greater flexibility, offering a wide variety of investment options and the ability to change investments if they are underperforming.

    The rules governing income drawdown are more flexible with SIPPs making it a good choice for individuals that don’t want to buy an annuity on retirement.

    There are further tax advantages for members of SIPPs that invests in commercial property, such as the pension fund benefiting from tax-free rental income.

    Disadvantages:

    With a SIPP, you will need the expertise and time to manage your fund (or be able to pay and advisor to do this for you).

    The administrations cost of a SIPP are higher than a Personal Pension and there will be transaction fees for moving the investments around. And don’t forget the initial set up fee. These fees can all add up, bumping up the cost of a SIPP.

    For those looking to invest in property there can be additional disadvantages, such as being forced to sell property at the bottom of the market.

    SIPPs, as with all investments, carry a level of risk and their value can go down as well as up. If the markets fall you may find you have less of a pension pot to buy your annuity with.