What is a SIPP?
A Self-Invested Personal Pension (SIPP) is a type of Defined Contribution (DC) "money purchase" pension scheme. It is an account designed to help you build a pension investment portfolio, which is then used to provide you with money when you reach retirement.
The amount of pension fund you will have at retirement will depend on how much you contribute (pay in), the time it is invested for and how well the investments have performed. The performance of investments is not guaranteed and may fall as well as rise. This means that you could get back less than you have invested.
A SIPP provides the same tax-efficient pension benefits and flexible retirement options as other types of DC pensions, but the key difference is that it offers you the freedom to make your own investment choices from a huge range of potential investments.
The SIPP account can run alongside an occupational pension scheme if you are employed and want to make additional contributions that you control, or it can serve as a standalone alternative if you are self-employed.
How is a SIPP different to other individual pensions?
If you are opening your own pension there are three options available:
- Stakeholder Pensions: These are typically offered by life insurance companies in accordance with minimum standards set by the government. They are the cheapest and most basic option, with low minimum contributions and capped charges. There is generally a default investment fund with only a limited range of other fund choices.
- Personal Pension Plans: These are also offered by life insurance companies and will have more features. Investment choices may still be limited to a range of the insurance company’s own funds, although some have now widened the range available to include funds from other mutual fund managers. These are generally more expensive than stakeholder pensions and you will have the ability to switch between different funds should you want to.
- Self-Invested Personal Pension (SIPP): A SIPP works in a similar way to a personal pension. The main difference is that they offer the most flexibility and control over the types of investments that can be held. For example, they are one of the few pensions which allow you direct access to stocks and shares, both in the UK and internationally.