Tom Selby, Director of Public Policy, gives an overview of Self Invested Personal Pensions (SIPPs). He discusses how SIPPs differ from other pensions, what investment options are available and how you can access your money in retirement.
Hello, I'm Tom Selby AJ Bell’s head of retirement policy and in this short video I'm going to talk you through self-invested personal pensions, more commonly known as SIPPs. As you can probably guess from the name, a SIPP is a type of pension that allows you to save and invest in a way that suits your own personal needs.
Like all pensions SIPPs enjoy generous tax perks and you can also pass money on to your loved ones tax efficiently when you die. You can learn more about how pensions are taxed through the various videos and articles on the AJ Bell website.
So, how is a SIPP different to other types of personal pension? Well while traditional pensions often restrict your investment options to a list of a company's own funds SIPPs let you choose from a much wider range of investments. You'll probably hear the terms contribution and transfer a lot in reference to SIPPs. A contribution is just new money paid into a SIPP while transfers involve moving money over from an existing pension policy.
There are lots of good reasons to move your pension. For example, consolidating your pensions with a single provider can make them easier to manage and also reduce the charges you pay. Over the long-term, this could increase the value of your pension by tens of thousands of pounds. If you are considering transferring a pension it's really important to check if it has any valuable guarantees attached as you might lose them when you change provider.
But SIPPs aren’t just for adults either - most providers including AJ Bell have the option of a Junior SIPP if you want to set up a nest egg for your kids. You can pay in up to £2,880 into a junior SIPP each year and the government will top it up to £3,600 through tax relief. That’s a bonus of 25%.
A SIPP might be the right product for you if you like the idea of being in control of your money and want to make your own investment decisions. Remember the value of your investments can go down as well as up so you might end up getting back less than you put in. Different SIPPs will offer different levels of investment flexibility.
Again if you look at the AJ Bell SIPP for example, it gives you access to a range of investments including bonds, shares from 21 different markets around 4,000 funds, investment trusts, exchange-traded funds and exchange-traded commodities. If you’d rather not pick your own funds or individual stocks, AJ Bell has a range of its own multi-asset funds aimed at investors with different risk preferences.
However, if you don't want to take any investment risk or don't feel confident about making your own investment decisions a SIPP probably isn't the right product for you. It's also worth remembering that like all pension money invested in a SIPP will be locked away until you reach age 55, with the age at which you can first access your pension set to rise to 57 in 2028. So if you want to invest your money but would prefer easier access, an ISA might be worth considering.
You can access up to a quarter of your pot tax free from age 55 through a SIPP and take the rest as an income through what's known as income drawdown. This is a way of using your pension pot to provide a regular income while keeping it invested in the stock market. It is possible to take ad-hoc lump sums direct from your pot. With 25% of each lump sum tax-free and the remainder taxed in the same way as income. Although remember that the value of investments can go down as well as up. If you want the certainty of a guaranteed income you could use some or all of your pension to buy an annuity policy from an insurer, which pays a set level of income for life. For certain people, combining the flexibility of drawdown with the security of an annuity could be the right solution.
I hope that's been helpful, if you're still unsure about what to do it's worth speaking to a suitably qualified financial adviser. Alternatively, there's loads more information and videos available on the AJ Bell website. Thanks very much for watching and happy investing!
