Cheapest SIPP

Your money is protected from the taxman

Just like any other type of pension, the SIPP wrapper protects your money from the taxman - you pay the money in before income tax is taken off. This is what it means in practice:

When a basic-rate taxpayer, paying 20% tax, invests £100, it only costs £80, for a higher-rate taxpayer, paying 40%, it would only cost £60; the amount that would've been in their pay packet if they'd paid tax.

When you come to take your money - anytime from age 55 - you can usually take up to 25% tax free and the rest will be taxed as income. See the How Pensions Work guide.

There are two type of SIPPs

There are two type of SIPPs - which one you choose will depend on whether you want advice or not on your investments.

1. Low-cost SIPPs

   

   These SIPPs can be kept low-cost, because you take no advice from the company you get the SIPP from - you're in charge. Some providers will let you start a low-cost SIPP with a sum as small as £5,000. However, it's generally recommended by the experts that you should have an existing pension fund of around £50,000 to transfer in, or be able to contribute several thousand pounds a year.
   
   When choosing a SIPP provider, it's good to think about how involved you want to be with your investment choice and what level of service you want from your platform. Some platforms, for instance, provide ready made portfolios for those who don't want to take command of their investment decisions.

   Some platforms pride themselves on a high level of service with all the mod cons in terms of apps and ability to make trades on the go. While others are more 'no frills' and what you see if what you get - this sometimes means slightly cheaper charges, but you have to weigh up whether you'd be better paying slightly more for a more comprehensive service.

2. Full SIPPs

   

   This type of SIPP - which has not been as popular in recent years - offers the widest choice of investments - including commercial property. You'll usually have access to a team who can help make decisions on what investments to hold in your SIPP and help administer more complex investments such as commercial property. But in return, they typically come with higher charges.

You can put different investments in a SIPP - including commercial property

SIPPs provide a massive investment choice. If you're a first-time investor, don't get carried away.

The experts advise that if you're new to the investment game, it's a good idea to buy share-based funds rather than individual shares - this will reduce your risk exposure if an individual company fails. To reduce your risk even further, buy a range of different funds.

Investments which can be held in a SIPP include:

How much can be paid into a SIPP each year?

While you can save as much as you like towards your retirement, there are limits to the amount you can save in a pension such as a SIPP and still get tax relief:

• Earners

  

  You can contribute 100% of your annual earnings before tax up to a limit of £40,000 for 2017/18. If you earn more than £150,000, the amount you can contribute is gradually reduced at a rate of £1 for every £2 earned over £150,000, until the tax-free limit hits £10,000.

• Non-earners

  

  You can contribute up to £3,600 per tax year and still get basic-rate tax relief. So, non-workers can pay in £2,880 per tax year, to which the taxman will add £720.

  In addition to your annual allowance, there's also what's known as a 'growth time allowance' - this is the amount you can save tax-free into your pension in your lifetime. It's currently £1m.

  Quick questions:

  How well off will I be in retirement?

  This is similar to asking "how long is a piece of string?". Investments by their very nature can go down as well as up. To ride out these bumps and help ensure the best outcome for your retirement, it’s a good idea to hold investments for the long term.

  As you get closer to retirement, it’s a good plan to reduce your exposure to riskier investments to prepare for a secure retirement income.

You can start a SIPP from scratch or transfer money in

You can either start your SIPP from scratch with money that hasn't been held in a pension, or you can move it from an existing pension.

• New contributions

  

  If you don't have a pension already and decide you want to start investing in a SIPP, you can open one either by making monthly contributions, or if you have a big lump sum you can invest that.

• Transfers from other pensions

  

  If you already have a few pension pots, you can consolidate them all into a SIPP so they're in one place (or just one or two if you wish). Or, if you're not happy with your current pension plan, this could be an option.

  If you do this, make sure you check there aren't any penalties for leaving your existing pension and that it'll actually be beneficial.

  Bear in mind that unless you've opted out, or are self-employed, you already will have or will soon have a personal pension thanks to the new pension auto enrolment rules. Here, your employer contributes to your pension as well, so this should be your first option if it's a choice between the two.

Most SIPPS are managed online

Most SIPPs are managed completely online. Phone and postal services may be an option, but make sure you check with the provider to see if it costs more.

You can buy and sell investments at the click of a button and keep an eye on how they’re doing, just as you'd check your accounts with online banking.

When can you take money out of a SIPP?

There used to be restrictions to how you could take your pension money, but since April 2015, you can take money from your pension from age 55 when you want, how you want.

For a lot of people, gaining access to their pension at age 55 will be too early, so you can just keep it in your pension until you need it. Some people however will want to take all their pension money at once. If you do this, the first 25% will be a tax-free lump sum and you'll get charged tax on the rest as if it were income.

Other options include:

Can a SIPP be inherited?

If you die before taking any money out of your pension, it'll be passed on tax-free to any beneficiaries. But there are a few caveats:

If you die before age 75

Your beneficiaries can take the whole pension fund as a lump sum tax-free. Dependants (but not other beneficiaries) can also choose drawdown or to buy an annuity to take an income tax-free.

If you die after age 75

Your beneficiaries have three options:

1. Take the whole fund as cash in one go: If they choose this, the pension fund will be subject to their income tax rate at the time.

2. Take a regular income: If they chose this through income drawdown or an annuity (option available only to dependants), the income will be subject to income tax at their income tax rate at the time.

3. Take periodical lump sums: If they choose this, the lump-sum payments will be treated as income, so subject to income tax at their income tax rate at the time.

For more information on inheritance tax and a full Q&A, read the Inheritance Tax guide.

Make sure your SIPP isn't being eaten away by charges

SIPP charges change from provider to provider and some can be expensive. You need to think about what sort of investor you're going to be so you don't get stung.

Take a moment to think about the investments you'll hold, how much they'll be worth and how often you'll change them, before working out which provider will be cheapest for you.

Charges going in vs charges on the way out

You need to look at how much the SIPP will cost you while you're putting money into it, and then how much the platform will charge you when you want to get access to your money again.

There's no point having a really cheap platform for your money on the way in, which costs you the earth when you come to take it out. However, like with a lot of things, how much this will impact you will depend on how much money you're investing and for how long.

The main charges you need to keep an eye out for are:

• Annual administration charge

  Also sometimes referred to as the 'platform fee', this is a charge for having the SIPP wrapper. It can be either a flat fee, for example £80/yr, or a percentage - which is usually tiered in accordance to your investment - for example, 0.30%. Some platforms don't charge anything for this.
  

• Annual charges for funds and shares

  Some platforms have an annual charge for funds and shares. This can either be a percentage, for example 0.45%, or a flat fee - for exaple, £80/yr. Sometimes the flat fee can go towards your trades. You'll often find the platforms that charge a percentage fee here, don't also have an annual administration charge.
  
  Yet some platforms charge an annual fee for investing in funds and shares, as well as a charge every time you trade. So if you know you're going to be an active trader, you want to look for a platform with the lowest annual and trading charges.

• Dealing charges

  Each time you buy and sell an investment you pay a fee. This can be up to £12.50 per trade. Some platforms will charge you for shares, but not for funds.

• Exit/transfer fees

  If you're moving money into a SIPP from another pension or shares you may be charged (and if you move it elsewhere). This can cost around £50.

• Income drawdown charges

  When it comes to taking the money, if you want to start drawdown on your SIPP, you'll have to pay a charge. This can cost anything up to £300 for the initial set-up, then up to £150 a year in ongoing charges.

Are SIPPS safe?

Usually with SIPPs, the broker you buy it through, eg, Hargreaves Lansdown, doesn't hold any of the cash; it simply acts as a conduit for you to put the money into whatever funds or investments you want.

Therefore, in the unlikely event it went bust, your money should be OK, and still held by the fund manager or bank it resides with. The protection applies should any of those go into default.

If the operator of a fund, trust or other investment vehicle you've put money into goes bust, you're eligible to get your money back, up to a maximum of £50,000.

If you decide to hold the money as cash within the SIPP, you're then normally covered under the standard £85,000 cover per person, per institution rule, the same as normal savings.

Ask your individual SIPP provider which bank the cash is held in (often it spreads it around up to five). Then check whether any other savings you may have are in institutions linked to those used for the SIPP cash, as cumulatively you'll only get up to £85,000 protection in each. See a table of which banks are linked to others.

If you put money in stocks and shares or funds that invest in them, then you've got a risk-based investment, NOT savings, and a totally different FSCS protection applies.

Critically, FSCS protection for SIPPs is very complex - so this is just a general guide, always check with your provider.

It's very important to understand that any protection only applies if you lose money because the investment's product provider goes bust - in this case the fund manager that you've bought into through the SIPP. Yet...

If the underlying investment goes bust, for example, if you have shares in a company and it goes kaput, or you've bought a fund and it performs poorly, then you've no protection as that's the nature of investing.