How to decide whether a SIPP is right for you

Sunday, 11 November 2012 04:27

Do your research when it comes to SIPPs

Do your research when it comes to SIPPs

Self Invested Personal Pensions (SIPPs) are becoming increasingly popular among those seeking greater control over their retirement income. However, they're not for everyone. Read our guide to find out how to decide if SIPPs are for you.

What is a SIPP?

First, you should understand what a SIPP actually is. It is, in essence, a tax-efficient wrapper for the investments of your choice. Where it differs from other pensions is mainly in the fact that you can pick from a wider variety of investments, something that is often marketed as a key benefit of SIPPs.

However, this does not mean that you can be sure of a higher income compared with, say, a personal pension. As with all investments, the value can both decrease and increase, so any income is not guaranteed. You should therefore be prepared to lose your investment and bear in mind that past performance is not a guide to future performance.

The asset classes you can invest in will vary from provider to provider, but generally you can choose from bonds, shares, funds, futures, derivatives, options and commercial property. This wide range can seem appealing, but it's only useful if you know what you're doing.

Experience counts

Because of the amount of control investors can have over their SIPP, this type of pension should only be considered if you already have experience of investments. You need to be prepared to carefully monitor your SIPP and buy or sell depending on market conditions and your own circumstances.

As such, maintaining a SIPP requires a high level of knowledge and confidence. If you're unsure about whether you fit the bill, take advice or stay away from SIPPs altogether.

Money matters

SIPPs have historically been associated with wealthy individuals and companies, but it's increasingly becoming the case that those with a modest income are opting for this kind of pension.

However, it's worth gauging your exact income and savings and fully researching the costs linked to SIPPs before you take the plunge. One reason why SIPPs have traditionally been the preserve of the affluent is because of the fees that are charged for opening and running an account.

Depending on the type of SIPP and the provider, these costs can seem high if you only have a relatively small amount of money that you're prepared to invest.

In addition, you should remember that the extent and value of any tax advantages or benefits of opening a SIPP will vary according to individual circumstances. The levels and bases of taxation may also change.

Pension alternatives

Another way to gauge whether a SIPP is right for you is to look at your existing pension provisions (if you have any) and/or other potential options to compare them with the SIPP route.

It may be that you would be better off staying with your current personal pension provider, for example, depending on the features of the product and the reason you signed up for it in the first place.

One important thing to note is that an occupational or contributing pension scheme could offer more benefits than a SIPP, so if you have the choice to join such a scheme, this is something you should consider.

Don't forget that, as with all pensions, you can generally only access your money from the age of 55, so bear this in mind too. Consult the SIPP provider you're thinking about signing up with to check when exactly you can withdraw your funds.



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