Many people worry about financial security in their later years when they can no longer work. It’s a normal thing to be concerned about. With the collapse of many pension plans and uncertainty over many others, even in the public sector, these worries now take on a new urgency. The hard answer is that it is increasingly down to the individual to make arrangements for their own retirement.
What is a SIPP
This is where the Self Invested Pension Plan (SIPP) comes in. A SIPP is a method that allows people to become much more actively involved in their retirement investments, and access a greater number of investment opportunities than conventional funds managed by pension companies. Subject to rules governed by HMRC, the individual becomes much more involved in decisions about where and how your pension fund is invested. You can even borrow money to help fund investments. Investments could include the stock market, fine wine, property, forestry, or any of a huge range of investment opportunities. If you are someone who follows the markets and you feel that you could have a good eye for an investment then a SIPP could be the answer. Although it is important to realise that, as with all investments, there is an element of risk involved.
There are a number of options of paying into a SIPP;
a) it can be set up with an existing fund;
b) by making personal contributions;
c) or by making a combination of the two;
d) employers may also contribute towards a SIPP.
A SIPP is quite flexible and you are able to set up regular payments as well as making one off payments. SIPPS are normally most suitable for people with larger than average pension pots.
Draw money from your SIPP in two main ways
- The first is in the form of a direct income. This is called an unsecured pension or income drawdown. Drawing an unsecured pension means that you are not locked into an annuity rate and you will be able to take advantage of possible higher rates in the future. On top of this, the remainder of your fund stays invested and can continue to appreciate as the investment continues. But this relies on the investment performing. If your investment should go down then so will both your income and your capital.
- The other option is to accept the locked in annuity rate, which may be slightly less, but which is guaranteed.
Setting up a SIPP
A SIPP can set up on-line. You should arrange to talk to a regulated adviser who can help in selecting the best options for you. By law you will be required to appoint an administration company and a trustee, but many companies provide both of these as part of their package, making the process simpler and easier and leaving you to concentrate on your investments.
There will be some costs involved in setting up your SIPP and although these will vary from company to company the following is a rough idea of what you can expect to pay for.
- A set-up fee – This will vary but should never cost you more than £500;
- Transfer costs – There will generally be a cost for moving money from a share investment or other pension plan into your SIPP;
- Investment fees – You may have to pay a fee for each individual investment you make. If you want to actively move your investments around, following the markets, then you can expect to pay more for doing so;
- Yearly management costs – Almost all companies will charge you a yearly management fee make sure you understand what this entails. Add up the assumed fixed and variable percentage charges that the company might charge over say 20 years, include entrance and exit fees to work out if there are better deals elsewhere.
Is my money safe?
This is probably the most important question to ask. The protection legislation surrounding SIPPs is, unsurprisingly, complex and will vary depending on your provider. You should seek clear answers in plain English from the company that you deal with. But here is something to consider. You will only get protection if your SIPP provider goes out of business. If the actual investments that you make prove fruitless then there is no protection whatsoever. SIPPs, like all investments, contain an element of risk which should be explained to you at the time of making the investment. If your investment fails, then you lose. It’s as simple as that.