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A Guide to SIPPs

From December 2018 the State Pension age for both men and women will start to increase and reach 66 by October 2020. With the prospect of working even further into their twilight years, young people especially need to start considering their pensions from an earlier age to ensure they are financially protected in the future.

Self-invested personal pensions (SIPPs) are an alternative to the traditional state pension scheme, which is dependent on the amount of National Insurance contributions you’ve paid. Instead, SIPPs are a form of personal pensions that appeal to those who want more control over their funds. SIPPs are approved by the UK government and allow individuals to make their own investment decisions from the full-range of investments that are approved by HM Revenue and Customs.

How Does They Work?

A personal pension works by paying regular monthly amounts or a lump sum to a pension provider, such as Alliance Trust, Killik & Co, or Barclays Stockbrokers, who invest it on your behalf. Family members can also pay a personal pension on your behalf. The earliest age you can take a personal pension is typically 55, though, depending on your arrangements with your pension provider, there may be special circumstances that allow you to take your pension early.

Are They Right for You?

SIPPs are available in two types, commonly referred to as “full” and “low,” both of which come with a unique set of fees. The average sum invested in a full SIPP is between £150,000 and £450,000. Fees can be flat or based on a percentage of the investment. There may also be an initial set-up fee, an annual management charge (AMC), and other trading charges. Many providers will also require a minimum contribution each month. Low SIPPs, though, may be more suitable for those with smaller savings. These offer a more restricted choice of investments—excluding direct property, offshore funds, or unquoted shares—but there shouldn’t be a set-up fee or any AMCs. However, you will pay trading costs when buying and selling shares.

While a personal pension may be suitable for self-employed individuals who don’t have access to a workplace pension, SIPPs are generally only recommended for those who have experience in the investment market. If this isn’t the case, you should consider seeking independent advice from a specialist before making such a big decision. You can also take a look at our guide on smart and safe investments.