Self-Invested Personal Pensions (SIPPs)

As the full name suggests, a SIPP is a type of DIY personal pension where you pick the investments yourself. You can think of it as being a bit like a self-select ISA, in that it's just a wrapper into which you put investments and, like ISAs, there is no Capital Gains Tax to pay on profits.

The difference is that SIPPs are basically subject to the same rules as personal pensions. They have the same limits on contributions, the same 25% restriction on the tax-free lump sum on retirement and the same restrictions on how you can take your money once you've retired.

In the past, SIPPs tended to have fairly high, flat-fee charging structures, meaning that they've usually only been suitable for people with relatively large pension funds. However, the arrival of online SIPPs, with far lower charges, has made them more suitable for a far wider range of people. It's reckoned that there are about 100,000 to 200,000 SIPPs in existence at the moment, depending on who you ask.

What can you invest in?

The permitted range of investments for SIPPs include stocks and shares on the world's major stock exchanges (and a few of the minor ones too, including those quoted on AIM), investment trusts, unit trusts, OEICS, gilts and even commercial property. There were plans to allow investment in residential property, i.e. buy-to-let, and other assets such as wine. However, the government backtracked on these proposals and now only allows indirect investment in such assets, through a fund for example.

In the case of commercial property, a SIPP can borrow half of its value to fund a purchase. Therefore a £100,000 fund will be able to buy a property worth £150,000. (Note that the rules prior to April 2006 were much more generous -- a £100,000 pension fund was able to buy a property worth £400,000). You can lease the property to a business that you own (on commercial terms), or to a third party. If you're a business owner, this can be tax-efficient since the rent comes out of the business's pre-tax income and comes into the SIPP as tax-free investment income. Online SIPPs, which tend to be cheapest, tend not to allow such investments however.

SIPPs and S2P

You are permitted to contract out of State Second Pension (S2P) if you're using a SIPP for your pension but the rebate you receive in its place doesn't actually go into your SIPP. Instead it goes into a type of personal pension called an Appropriate Personal Pension.

Are SIPPs worth it?

So, are SIPPS a good thing? Well, you'll be controlling your own nest egg, so you need to be a reasonably experienced investor. You can freely shop around for the annuity you want to buy when the time comes (though you can do that with any pension). There is also the added benefit of selling shares outside of an ISA or SIPP to realise capital gains and then buying them back within a SIPP to collect the tax relief on the way in.

As always, low charges and enough flexibility to meet your current and future needs are, as usual, the key things to consider.