The Self-Invested Personal Pension or SIPP was first introduced in 1989. Unlike a conventional pension plan where the money is invested by the scheme manager, a SIPP allows you to choose where to invest your funds.
You can have a SIPP alongside other pension schemes and can contribute up to 100% of your earned income up to a maximum of £50,000 across all your pension contributions. The government pays back the tax on your contributions so at the basic rate a £1 pension contribution into your SIPP will only cost you 80p.
You can pay in a lump sum or make regular monthly contributions to your pension. You also have the option to transfer other pension plans into your SIPP. If you have an old pension that isn't performing well for example, you might feel that you can do better by managing it yourself.
How Can I Invest My SIPP?
You have the choice of how you invest your SIPP. You can put your money into shares, unit trusts and all of the usual stock market vehicles. It's also possible to invest in commercial property. What you can't invest in is residential property, so you can't include your house in your SIPP or things like fine wines and classic cars.
Most SIPP providers will let you manage your account online so you can easily switch between investments as you wish. Do be aware of any charges that you might incur by switching funds though. If you switch too often these could eat into the value of your pension.
The advantage of a SIPP is that you can control your own risk. Generally the riskier the investment the better the returns and because you're managing your own money you can take a more adventurous approach.
You can also manage your risk over the life of the fund by going for riskier investments in the earlier days to make maximum growth but by switching to safer funds in order to protect your pension pot as you move closer to retirement.
Is a SIPP Right for Me?
By their very nature SIPPs are best suited to people who want to be in control and are happy to do some homework in order to manage their pension. If you're confident in doing this then it's a good choice.
A SIPP is also good if you can make regular monthly contributions. This allows you to even out the ups and downs of investments as your regular payment gets you more shares when the price is low and fewer when it's high.
What's the Alternative?
In terms of personal pension funds the alternative to a SIPP is a usually stakeholder scheme. These are designed as simple, cheap schemes into which you can pay up to £3,600 each year. Like a SIPP you can pay in up to the age of 75 and you get tax relief. The choice of investment is much more limited than in a SIPP and they tend to be medium or low-risk funds so the potential for growth isn't as high.
It's worth remembering that if your employer offers a pension scheme this will always be a better option as they will make contributions too. Even if you have an occupational scheme you can make contributions to a SIPP alongside (up to the £50,000 limit we mentioned above) which is a useful way of topping up your pension.
A SIPP isn't right for everyone but if you like to feel you're in control and carry out a pension review on a regular basis then it's an option that's well worth considering.
Kay Brown is a writer who is always on the lookout for ways that you can control your finances. She recommends combining an SIPP with a regular pension review to help you to stay in control of your retirement plan.
