What is a SIPP?

Have you heard the term SIPP and wondered what it means? Alice Guy takes a look at what a SIPP is and weighs up the pros and cons.

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Are you comfortable making your own investment decisions? Do you want to have a DIY pension? If so, then a self-invested personal pension or SIPP might be for you. Here I investigate three questions: What is a SIPP? What makes it different from other pension schemes? And what are the pros and cons of this type of pension?

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What is a SIPP?

As the name suggests, a SIPP is a DIY pension. It is aimed at investors who are confident managing their own pensions rather than taking financial advice. It’s a great option if you want a wide range of funds to choose from as this type of pension often has more choice than a traditional personal pension. It also usually has lower fees and charges than other schemes.

A SIPP is particularly useful as a second pension if you are already paying the maximum amount allowed into your company scheme. It’s also a popular option with investors who don’t qualify for an employer’s pension or are self-employed.

What are the benefits of a SIPP?

  • Lower fees – a SIPP typically offers lower fees than a traditional pension. If you have an older style pension with a 1% fee, it may not sound like a lot. But over time, it can really eat into your investment growth. In contrast, a SIPP usually has a fee of between 0.15% and 0.5% of the total pension value. Some SIPPs have a flat fee structure where you pay the same set fee whatever the size of your investment. This can offer great value if you have a large pension pot.
  • Wide choice of funds – SIPPs usually offer a very large choice of investments. For example, Hargreaves Lansdown offers a choice of over 2,500 funds.
  • Different types of investments – As well as investing in share funds, SIPPs often include a wide variety of other investment options. Investors can choose between unit trusts, investment trusts, government bonds and individual shares.
  • Great for consolidating pensions – because SIPPs have low fees, they are a popular choice for people nearing retirement who want to consolidate lots of smaller pension schemes they have accumulated over the years.
  • Tax relief – SIPPs benefit from government tax relief in the same way as other pension schemes.

What are the drawbacks of a SIPP?

  • Lack of advice – a SIPP is a cheap option because it comes without financial advice. This may be an issue if you aren’t comfortable making your own investment decisions.
  • Can be confusing – with so many options to choose from, a SIPP can be overwhelming. It is sometimes simpler to invest in a scheme with a limited number of options.
  • No employer’s contributions – for most people, it probably makes sense to join your employer’s scheme first and make the most of the free contributions. A SIPP can be a great choice as a separate second pension on top of your company scheme.
  • Money locked away – just like other pension schemes, you won’t be able to access your SIPP investment until you turn 55. If you might need your money before then, you could consider a stocks and shares ISA.

And finally

If you’re not sure whether a SIPP is right for you, then it may be best to take financial advice before going ahead. Although a SIPP doesn’t come with financial advice, there’s nothing to stop you from seeking independent advice before you take the plunge.