Self-Invested Personal Pensions (SIPPs)
December 1, 2010
As the full name suggests, a Self Invested Personal Pension (SIPP) is a type of DIY personal pension where you pick the investments yourself. Since their introduction in 1989, they've enabled many people to take much more control over their retirement plans and avoid the high charges of many old-style pension schemes.
You can think of a SIPP 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 tax relief for 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 a few hundred thousand SIPPs in existence at the moment.
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.
SIPPs and S2P
You are permitted to contract out of the State Second Pension (S2P), if you're using a SIPP for your pension.
It used to be the case that the rebate you receive went into a type of a different personal pension called an Appropriate Personal Pension, and not into your SIPP. In 2008 this changed and you can now receive these rebates directly into your SIPP. Or at least, you can until April 2012, when the practice of contracting out will be scrapped.
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). You may also be able to benefit by selling shares outside of your ISA or SIPP, to realise capital gains, and then buy 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 the key things to consider.
The Fool is definitely a fan of these schemes though, and we even offer SIPPs through the Motley Fool Share Dealing service.