Tom Selby, Senior Analyst, explains what Self Invested Personal Pensions (SIPPs) are.
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What is a SIPP?
Hi I’m Tom Selby, AJ Bell’s senior analyst, 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 Youinvest website.
So how is a SIPP different to any other type of pension? Well, while traditional pensions often restrict your investment options to a list of the 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 simply new money paid into a SIPP, while a transfer is moving money over from an existing pension policy.
If you are transferring a pension, check if it has any valuable guarantees as you might lose them when you change provider.
And 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 and the Government will top it up to £3,600 through tax relief.
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. The AJ Bell Youinvest SIPP, for example, gives you access to a range of investments, including bonds, shares from 21 markets, around 4,000 funds, investment trusts, exchange traded funds and exchange traded commodities.
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 for you.
It’s also worth remembering that, like all pensions, money invested in a SIPP will be locked away until you reach 55. 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 is known as drawdown. This is a way of using your pension pot to provide a regular income while keeping it invested – although remember the value of your investments can go up as well as down. If you want the certainty of a guaranteed income, you can use the rest of your pot to buy an annuity – a policy which pays a set level of income for life - rather than drawdown.
I hope that’s been helpful. If you’re still unsure what to do, speak to an FCA-regulated financial adviser.
Alternatively, there’s loads more information and videos available on the AJ Bell Youinvest website.
Thanks for watching and happy investing.