Is a SIPP Right for You?

by David Redmond on 10 Oct, 2012

For many people, retirement may be a daunting prospect. This is because the state pension, which will provide little over £100 a week, may not afford you the standard of living that you have become accustomed to. Consequently, how much you enjoy your retirement can depend on the steps taken to supplement your pension before the end of your working life.

So whether you are 20 years or six months away from retirement, it is never too early or too late to plan for your later life.

Start Preparing for Retirement Now

To make a successful retirement plan, you will need to know what choices are available to you. An option that has become increasingly popular among pre-retirees are SIPPs, otherwise known as a Self-Invested Personal Pensions. But what exactly is a SIPP, and how can it be used for retirement planning?

Well a SIPP is a government-approved retirement scheme that allows individuals to take control of their own pension investments in a range of assets approved by HM Revenue & Customs (HMRC). Investors make their own decisions and choose what assets to buy or sell within the SIPP, as well as manage the investments themselves.

So if you would prefer to manage your own pension investments within a tax-efficient vehicle, then a SIPP could be a perfect solution. Confident investors can invest in specific shares, funds, commercial properties, bonds, and derivatives to include in their own SIPP.

But before signing-up to a SIPP, it is important to understand that a SIPP isn’t suitable for everyone and you should seek independent advice if you are at all unsure. Each type of investment will have its own consideration for instance with shares, you’ll need to think about whether you want to purchase stocks in firms with small or large capitalisation, or even to invest in UK-based firms or foreign companies.

In a similar vein, with bonds you will need to consider both the advantages and disadvantages of investing in government-backed bonds or company bonds. While the former is perceived as a safer bet than the latter, it still doesn’t mean that you will not lose your money.

This is because managing pension investments can be a risky strategy, as the value of investments can fall as well as rise, and any income from them is not guaranteed. You should be prepared to lose your investment, as past performance is not an accurate guide to future performance. Therefore you should only use a SIPP if you have done your research, and understand all of the risks involved.

Final Considerations

If you are willing to take a risk or two, a SIPP could be a great way to bolster your retirement income. But remember, the extent and value of any SIPP tax advantages or benefits will vary according to the individual’s circumstances. The levels and bases of taxation may also change.

If now or in the future, you have the option of joining an employer’s occupational or contributing pension scheme, you should consider joining or making contributions to it. Once in a pension your money is only accessible, in general, from the age of 55.

It is also important to note that before transferring a pension, you should check that you won’t lose any valuable benefits or incur excessive charges.


About the Author

David Redmond

David Redmond is a Partner of Don Gilliard Finance Group. He is a fee-only, independent financial advisor and financial planner. For over 15 years, he has been helping individual investors and their families realize their investment goals.