The beauty of a
self-invested personal pension (SIPP) is that you have significantly more control over how your money is invested than with a traditional workplace pension. But just how much freedom are you afforded when it comes to where and how your investments are distributed?
When it comes to using pensions to build a nest egg for your future, the term SIPP is often used synonymously with ‘DIY’ pensions, but are you really using a ‘do-it-yourself’ format when building your investment portfolio?
In a nutshell, a self-invested personal pension allows you to receive tax benefits while making your own key investment decisions. Unlike a traditional workplace pension, where a provider will make investments on your behalf, a SIPP allows full control over
the assets that you use to build your pot as you approach retirement age.
How SIPPs are Different
Like traditional pensions, SIPPs offer savers a series of tax benefits. Notably, you don’t have to pay any capital gains tax or income tax on your investments as they grow.
When using a SIPP, you can also opt in to receive a tax relief top-up of 25% on personal contributions. But self-invested personal pensions also come with a significant level of control over many other areas associated with building your investments.
You’re free to pay your own money into a SIPP and can adjust how much you pay in throughout the year. This freedom makes self-invested pensions a popular choice for self-employed workers who want to make personal contributions, particularly if they’re based
in seasonal industries or have an inconsistent income each month.
This flexibility also makes SIPPs more appealing to investors who want to operate a pension alongside their workplace pension pot.
What Investments Can I Make?
Because much is made about the
flexibility that SIPP investing affords you, many would-be investors mistakenly believe that they have to make their own investment decisions when opening a self-invested personal pension. This isn’t the case, however, and many SIPP providers will still
manage your money for you by default.
While investment options can differ from provider to provider, you’ll generally have the
following options to choose from when populating your SIPP’s portfolio:
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Stocks and Shares: This refers to buying a portion of a company that’s publicly traded on a supported stock exchange.
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Funds: Representing a collection of stocks that are usually linked by their industry or region.
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Government or Corporate Bonds: As an alternative form of lending, bonds are when organisations pay you interest to borrow your money.
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Commercial Property: Whether you buy commercial property yourself or collectively with others, this can help to provide exposure to real estate.
The great thing about SIPPs is that they can provide exposure to several different investment strategies, allowing
you to shape your portfolio in a way that you are comfortable with.
Self-invested personal pensions can also cater to different levels of risk appetite, meaning that you can increase your exposure to risk by opting for speculative stocks or funds, or instead choose lower-risk bonds as an alternative strategy.
As you approach retirement and begin to consider switching your exposure to more volatile markets, you can also convert your stocks into bonds at a time that suits your needs best.
Choosing the Right SIPP Provider
Even though SIPPs put you in control of your investments, there are still many considerations that you should take into account when choosing the right self-invested pension for your needs.
For instance, fees
can differ significantly from provider to provider. Always check platform fees, trading costs, and various other charges before committing to a SIPP provider.
It’s also worth taking a moment to check reviews of your chosen provider before getting started. Making sure your investments are safe should be a priority, but factors like ease of use and around-the-clock support can also be crucial considerations.
Accessibility should be frictionless with your SIPP provider. You’ll need to regularly review your investments to ensure that they still align with your retirement goals and risk appetite.
Your Responsibility
By taking on more control over where your SIPP investments are distributed, you’re taking full responsibility for researching and managing your investments.
If you’re comfortable with taking your investment risks into your hands, then a SIPP is the perfect investment tool for planning your retirement.
Fortunately, the greater levels of flexibility within your SIPP mean that providers that offer in-house investment teams to manage things for you could help you to populate your pension pot. If you’re still struggling with your investments, you can always
consult a financial adviser for advice.
