A Self-Invested Personal Pension (SIPP) is specifically designed for investing in preparation for retirement, even if it is still decades away.
But it comes with limitations that do not apply to a ISA, specifically, that once money is put into it basically cannot be taken out again until the person reaches a specified age.
That makes a SIPP considerably less flexible than a Stocks and Shares ISA, which allows money to be taken out at any point.
So, why might someone bother using a SIPP at all?
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Discipline to help investors act for the long term
One reason is actually precisely because the money is locked up.
Life can throw up unexpected expenses. For most of us, there will be times when it would be handy to be able to access some money we have that is tied up. That might be in a SIPP, but it could be in lots of other places, such as a property or in a savings bond.
That very temptation helps explain why the SIPP is structured as it is. It is specifically designed to impose a discipline on people, reducing their opportunity to spend their pension before they reach the age they may need it as a pension, rather than for general living expenses.
A SIPP can offer sizeable tax rebates
Another big reason is the potential tax benefits.
A SIPP offer tax-free capital gains and income growth inside its wrapper. So for someone who has maxed out their annual ISA contribution allowance, it could be another avenue for tax-efficient investing.
But while an ISA helps wrap money inside a tax wrapper, a SIPP goes one better.
Contributions receive tax relief. Even at the standard rate of 20%, that is a significant factor to consider. For higher and additional rate taxpayers, the rebate offered by a SIPP can be greater still.
One share I own in my SIPP
One of the shares in my own SIPP is Crocs (NASDAQ: CROX). So far it has been disappointing and unfortunately I am not convinced that will change any time soon.
The company has been hit by tariff disputes due to its international manufacturing footprint. But a thornier challenge has been its acquisition of another brand a few years ago at what I saw as a high price. As I see it, that brand lacks the simplicity and uniqueness of the core Crocs range of shoes.
Management has been trying to get the business back on the front foot, but meanwhile Crocs shares have not met my expectations.
But I am a long-term investor and, as I see it, the long-term investment case for the utilitarian yet iconic footwear brand remains appealing.
Its shoes are cheap to make, the basic design lends itself to large numbers of tweaks to help keep things fresh and the brand itself has built a strong market niche.
I am not expecting an overnight miracle. But I have no plans to dump my Crocs shares from my SIPP. I am hoping that the investment will do well in years to come.
