Frequently Asked Questions
What is a Sipp and do I need one?
In simple terms a Self Invested Personal Pension or Sipp is an investment savings vehicle aimed specifically at producing income, or a tax-free lump sum with a reduced income, in retirement. It is tax efficient and allows the investor greater control in what investments are held.
The range of investments that you can hold in a Sipp can include such things as stocks and shares, collective investments such as unit trusts to bank deposits and commercial property.
Despite being previously widely commented on, there are distinct tax disadvantages in holding exotic assets such as vintage cars, wine, stamps and art.
The tax treatment of a Sipp is identical to that of a conventional personal pension that you may take out with an insurance company. Individual contributions receive automatic tax relief at the holder’s marginal tax rate while any contributions by employers are allowable against corporation tax or income tax.
Income from assets in the scheme will generally remain untaxed and growth within the pension is free from capital gains tax.
Income taken in retirement from either an annuity or via Unsecured pension ( or income withdrawal as it is also known) is taxed as earned income at the member’s highest marginal rate.
Understandably whilst more flexible, the structure of a Sipp is slightly more complex than a personal pension and necessitates the involvement of a scheme administrator. The administrator exercises control over what happens within the Sipp and ensures that the requirements for tax approval continue to be met.
The question of whether an investor needs a Sipp over a personal pension plan will depend largely on the specific investment desires of the individual investor.
The fullest investment choice is available via the Sipp but this must be balanced against the slightly higher administrative burden and the underlying costs involved with the running of a Sipp.
However, as these products have now moved firmly mainstream it is often possible to find that the costs do not vary hugely, particularly once the investment funds have grown to reasonable levels.