There are lots of different reasons investors may decide to use a Self-Invested Personal Pension (SIPP) as a platform for buying and owning shares.
Some might be less to do with the SIPP than alternatives. Perhaps the investor has already used all of their ISA limit for the current tax year, for example.
But some reasons people use a SIPP are specific to it. Let’s explore some more…
Tying your money up – good or bad?
I’ll explain below what I see as the main advantage of a SIPP.
But it’s worth mentioning that the platform has other notable features too.
For example, unlike an ISA or share-dealing account, once you put money into a SIPP you can’t take it out again for any reason until you hit a certain age (currently 55).
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.
Is that bad or good? That depends on your perspective, I’d say.
It could be really annoying if you wanted to tap into that money before 55, for any reason. But it could be good precisely because it effectively strips investors of that temptation.
This is the SIPP’s big attraction for me
There are other pros and cons compared to alternative investment platforms, such as the tax treatment of capital gains and dividends. Those are tax-free in an ISA, for example, in a SIPP at least some of them could potentially be taxable.
So, why bother even considering a SIPP?
In short: free money.
Free money, you say? Surely too good to be true?
Well, the money may not exactly be free – it’s money we’ve all already paid to HMRC.
The SIPP offers tax relief meaning that, for example, if a standard rate income taxpayer puts in £800, it’ll be topped up by £200, meaning they’ll have £1,000 in their SIPP.
For higher and additional rate taxpayers, the benefit can be even greater due to higher levels of tax relief. Even for a basic rate taxpayer, though, I reckon this is a very attractive feature of the SIPP structure.
Investing for the long term
The SIPP’s period of locking in the money marries neatly with my long-term approach to investing.
One share I own that I plan to hold in my SIPP for the foreseeable future is Greggs (LSE: GRG).
The baker’s had a lousy run on the stock market of late. It’s already down 9% so far this year, meaning that the Greggs share price is now 36% lower than five years ago.
Still, that has pushed the dividend yield up to an attractive 4.5%.
Greggs does face some real challenges. Its large network means some shoppers have grown fatigued of the ubiquitous brand.
Staffing so many branches – with more in the works – means its profits are vulnerable to increases in costs like wages and National Insurance contributions.
But the business is profitable and continues to grow.
Its strong brand and keen price positioning make it a firm favourite with legions of hungry customers. To me, the share looks undervalued and I plan to keep hold of it.
