Questions you Want to Ask about SIPPs
Do-it-yourself projects have grown very popular over the last few decades. It is probably because of people’s innate desire to do things themselves or to be in control. It can also be because this gives us that unique sense of fulfillment or achievement that only DIY projects can give us.
It is not any different with pension plans. SIPP is a Do-It-Yourself pension plan that allows you to decide which modes of investment your pension fund will be invested in. Unlike with standard personal pensions, wherein your options are limited to what the insurance company offers, here you get a wider range of possibilities, making freedom and flexibility within your easy reach.
If you have never heard of SIPPs before, here are some of the possible questions that you may want to ask about it to know this type of pension scheme better.
What does sipp means?
SIPP stands for Self Invested Personal Pension. This kind of pension rewards you with complete control over your pension fund and where this will be invested. SIPP was born on 1989 but it is not until rules were simplified in April 2006 that people began to really go for this pension scheme.
What investment options do I have?
As mentioned earlier, the options on SIPP investment are countless. To give you an idea on what kind of investments you can have in your SIPP, here are just few of them:
* Stocks and Shares
Individual UK or foreign equities on recognized stock exchanges
Futures and options
Corporate bonds
Government Securities
Permanent Interest Bearing Shares
* Collective Investment Funds
Unit trusts
Investment trusts
Managed funds by an insurance company
Unit linked funds
Open Ended Investment Companies
* Other Types of Investments
Cash deposit accounts with banks and building societies
Loans
Commercial property
Who are eligible to take out a SIPP?
Any UK resident who is a taxpayer and who is under the age of 75 is qualified to take out a SIPP. If you are below 18 years old and you want to get a SIPP, you will need to have it taken out for you by your parent of legal guardian.
Prior to the changes in SIPP rules in 2006, SIPP was only accessible for high earners who had personal pension funds in excess of 200,000. However, after 2006, SIPP has become a more realistic option even for people who only have modest earnings.
How much can I invest?
Whether you are employed or self-employed, you can invest as much as 100% of your total annual earnings minus the other contributions that you also have to make. If you are already retired or not any more employed you can invest as much as 3,600 annually.
What is a SIPP tax relief?
A SIPP tax relief means that you will be able to enjoy all the tax benefits of a personal pension scheme. Simply put, you will be able to receive tax relief at an individual’s highest marginal rate. The basic rate tax relief is 22% so if example, you put in a 1,000 into a SIPP, you will pay the 780 and the UK Government will pay in the other 220 which is equivalent to basic rate tax at 22%. Those who are higher-rate taxpayer, you can claim a further 18% tax relief by filing their tax return. Therefore, your 1,000 contribution would cost you only 600.
What are the benefits of taking out a SIPP?
The number of SIPP advantages is countless. The most obvious one is the tax benefit since we all know that any investment made in this pension scheme is tax-free. For higher rate payers this means a discount of 40%. Even those who are low ordinary tax rate payers, a savings of about 20% is already good enough.
Aside from that, SIPP also spells out greater freedom and flexibility on the part of the pensioner who is allowed to decide where to invest his money fund. So, if you are the type of person who has a fair knowledge and expertise on investments and you deem that the options offered to you by your regular personal pension provider will not be enough to stimulate the growth of your money, then SIPP pensions is the way for you.
What are the drawbacks of SIPPs?
Although we can see the numerous benefits of taking out a SIPP, it is important to remember that this is not suitable for everyone. One of the serious drawbacks in a SIPP plan is the fact that if you buy a property with your SIPP fund, this property will be owned by your pension fund and not by you.
This means that you need to ask permission from the trustees before you can do home improvement or renovations. Furthermore, you will be required to pay a market-rate rent, which would make you feel like you are a tenant in a house that is supposedly yours.
Can I withdraw my money before I retire?
Unfortunately, no one is allowed to acquire the funds in their SIPPs until they reach the age of 50.
What are the fees involved in taking out a SIPP?
Fees vary from one pension provider to another but the common charges that you will encounter along the way include:
* Set-up fee some providers have zero set-up fees; some charge up to 500.
* Annual management fee small percentage of fee applied annually on your returns. Always strive to get a fixed rate on annual management fee.
* Initial charges on funds.
* Dealing charges on shares and investment trusts.
* Transfer fees fees applied if you are moving from one pension provider to another.
* Exit fees
* Interest rate
* Costs for buying annuity
Make sure that you inquire all about these charges and other possible hidden charges that will be incurred in your SIPP plan. Aside from that, it is imperative that you study extensively about this topic so that you will end up with the best SIPP plan and avoid any problems in the future.
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