In the never-ending drive to make personal pension planning as attractive to the masses as possible, the UK government created a fresh variation of the personal pension plan.
The Self Invested Personal Pension (SIPP) was created in 1989 but it wasn’t until a second round of legislation in 2004, which tallied with the relentless march of the internet and its empowerment of individuals, that it began to be attractive to the markets and individual investors alike.
Personal Pension Plans – An Outline
A personal pension plan is often referred to as a “tax wrapper” by industry insiders which really points to one of the main attractions. In return for leaving your money in a pension plan, the government rewards your good behaviour with tax breaks related to your own income and the size of the investment you have made. The specific tax reliefs on offer change frequently so we won’t go into them here, suffice it to say that tax relief is one bonus of the personal pension plan.
By placing your cash in a certain fund it can then be invested in a range of “approved” products to earn you profit (fingers crossed) and to add to the tax breaks Her Majesty’s Revenue and Customs (HMRC) provide. Now – be careful here because “approved” does not mean looked at, reviewed and certain to make you a profit.
Approved in this sense means it’s on a list of products and services that HMRC has identified as being important to the economic future of Great Britain PLC. At the end of the day the government is seeking to create a world where investment in industry is encouraged and can be depended upon (so you can’t pull your pension early), as well as ensuring that you are less dependent on state help in your golden years. Both ends are achieved through tax breaks.
When you invest in a personal pension your funds become the “property” of the pension fund you have paid them to and in return for your commitment to leave them there, the pension fund will invest them on your behalf and in doing so will hopefully secure a return that outstrips inflation.
Of course, investment professionals don’t work for free and the cost of running the pension fund and ensuring it remains compliant with ever changing HMRC policies will need to be met by you, the investor. Finally, the pension house also charges a fee for managing your funds.
SIPPS in Particular
A Self Invested Personal Pension (SIPP) is a form of personal pension plan that is structured to make it more attractive to today’s go-it-alone type of investor. In terms of limits to contributions and tax relief available, there is no difference to other personal pension plans.
However, as individual investors have gained more knowledge of how the markets work and the internet has delivered the market to everyone’s front room, there has been an increased demand from investors for a new approach to pension planning, hence the SIPP’s popularity.
The SIPP puts more of the decision making about where to invest into the hands of the individual, rather than the pension plan provider.
The difference between SIPPs and traditional personal pensions lie in two areas as follows;
Areas Where You Can Invest
In creating SIPPs, HMRC has increased the number of approved investment assets. The larger range of assets makes the investment process more attractive to anyone motivated by managing their own investments.
The approved investment areas include;
• Stocks and shares quoted in recognised stock exchanges.
• Government gilts
• Unit trusts
• Investment trusts
• Insurance company funds
• Endowment policies
• Deposit accounts
• National savings products
• Commercial property
In effect, it is possible to invest in almost any asset through a SIPP but should the asset fall outside of the approved list, HMRC will apply tax penalties.
How Your Pension Plan Is Administered
The second area of significant difference between a SIPP and a conventional pension plan is in the administration and operation of the plan.
Contrary to a traditional personal pension, the individual investing in a SIPP retains ownership of the funds which are held in trust by a trustee, usually an employee of the pension plan provider.
Those investors wishing to retain even closer control over their funds can assume the role of the trustee but a suitably qualified and experienced third party, acting as a co-trustee, must be appointed to oversee compliance issues.
As you retain ownership, decisions about what investments should be made are taken by you, the SIPPS owner, rather than the pension provider. Note that despite the wide list of investment vehicles on the approved list, there is likely to be a restricted list of investments any given pension provider will work with.
This ownership factor lies at the heart of the major difference between conventional pension plans and a SIPP.
Your provider will invest in the assets you ask them to invest in – which means that you have to be responsible for understanding how market conditions, at any given time, are likely to affect your investments. You can’t hide behind the skill and expertise of a highly paid fund manager. You assume that responsibility yourself.
A SIPP therefore offers you more control of your pension planning than ever before, but it is not for everyone. You need to be honest with yourself and assess whether you have the know-how and the nerve to go it mostly alone.
If you do, you can take pride in the fact that you are actively and proactively managing your finances for your golden years.