A SIPP puts you in charge
1 June 2007
Self-Invested Personal Pensions (SIPPs) - the pension plans that you control.
Play it the way you want it
There’s nothing like being at the top of your game, and SIPPs really put you in control of your pension. You’re in charge.
SIPPs have been around for a around a decade bringing a new freedom and flexibility to the way you can prepare for and enjoy your retirement. You can blend your pension any way you want.
SIPPs offer:
- more simplified pension structure
- wider choice of investment options
- more flexible approach to pension contributions
- choice in the way you can withdraw your pension at retirement
Freedom and flexibility
In April 2006, the Government introduced legislation which simplified the restrictive rules applying to some pension products. Although some limits still apply, how much money you can put in and how much you can take out on retirement, became a thing of the past.
A world of opportunities
But, if you are new to SIPPs, the thing that will probably strike you first is the extraordinary control they give you over your financial future. Rather than working within a scheme set up by others you can decide your own destiny.
Of course, that is both an opportunity and a challenge, and it is important that you seek the guidance of a specialist financial adviser.
The pension that grows with you
Once your financial adviser has recommended that you invest in a SIPP the sooner you start the better. That way you will be able to build up the maximum fund for your retirement.
Even if you don’t feel you are ready to embark on an adventurous savings and investment programme just yet, you should start saving now because a SIPP is the pension that can grow with you.
Stage one – deferred investment
You can start your SIPP now without having to worry about the complexities of investment. You simply pay your premiums into a pension fund until you have built up sufficient funds to contemplate setting up a pension investment portfolio.
Stage two – self-investment
When your pension fund has grown a bit, you may feel you are ready to take the plunge and broaden your investment horizons. A whole world of investment opportunity awaits you. The choice of investments is bafflingly wide and you will almost certainly need the expert help of a financial adviser to select the pension investments that are right for you.
Stage three – at retirement
When you start to think about retirement, you will be pleased with the flexibility a pension offers, though you might also be concerned about the potential risks. The good news is you have a number of choices. You could opt for safety and buy an annuity or choose income drawdown.
Annuity:
An annuity is an insurance contract where a pre-determined regular fixed or index-linked income is paid to you until you die. An annuity could suit you if you seek certainty or believe that with increasing life expectancy future annuity rates might fall. You can still take up to 25% of your pension savings as a tax free cash lump sum. There are several types of annuity to choose from, find out more from our article in The basics: Annuities
Income drawdown:
Income drawdown allows you keep the greater part of your pension invested. After you have taken your tax free cash you can, within limits, select how much you want to be paid as a regular income. Your income will be paid monthly, quarterly or annually so long as you have sufficient funds in your pension. What’s more, if your circumstances change, such as ill health, you can vary the amount you are paid to make your life more comfortable.
Since many people can expect to be retired for 20 years or more, there can be a great advantage in keeping your funds invested with the potential for steady growth. You must bear in mind, though, that the value of your pension fund could fall as well as rise.
Pick the right tools for the job
In considering which SIPP to choose, besides that all important freedom and flexibility, you need to look for a framework that protects your interests without restricting your choice.
If you want to play safer, you could consider in-house administration, where one company takes personal care of your pension, and you will only have to make one call to handle any SIPP queries.
Be sure to look out for any exit penalties and transfer charges.
Remember, SIPPs are for people who are committed to building a substantial retirement fund and they’re not for everybody. You may have to consider increasing your contributions to meet your ideal investment target.
Some pension providers require a minimum fund (say £25,000) before they allow you to self-invest your pension portfolio. The best way to check this out is to go online, pick a few providers and see what their terms are.
You can retire at any time between the ages of 50-70, but you should note that the Government will raise the minimum retirement age to 55 from 2010.
Freedom of choice
Most SIPP providers offer an impressive investment portfolio that you can tailor to your pension needs.
You could consider tracker funds, which track stock market indices around the world and so avoid the problems of stock picking. By following the index as a whole, although you cannot outperform the market you can at least be sure that you won’t be investing in underperforming shares.
You might even think about with-profits, where investment performance is ‘smoothed’ to even out the returns between good and bad years. Remember though, as with-profits is a pooled fund, your money could be subject to an Market Value Reduction (MVR) to protect the interests of all the investors in the ‘pool’.
Many providers now offer ‘wrap’ platforms which offer over 200 collective funds picking the best from investment houses around the world.
Protecting the value of your pension
A pension is a long term investment and as retirement approaches, you might want to take a ‘lifestage’ approach and think about switching your investments into less risky assets.
Let’s assume that at age 55 one third of your pension is held in UK Equities.
While you might think that doesn’t expose you to too much risk you might want to switch your investments gradually out of shares and into fixed interest securities and cash for maximum security in the 10 years before you retire at age 65.
