Build a low-cost DIY pension
A low-cost SIPP is a DIY pension that lets you choose your own investments and allows YOU to manage your pension pot, meaning you know exactly where your money is and how much it'll cost.
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SIPPs for beginners: The 11 need-to-knows
How does a SIPP work?
A SIPP is a DIY pension. Traditional personal pensions limit your investment choice to a shorter list of funds normally run by the pension company's own fund managers. With a SIPP you can invest almost anywhere you like and choose your own investments. These are often refereed to as 'execution only' meaning you take no advice from the firm where you keep your SIPP.
But with that flexibility comes responsibility. A SIPP is for someone who understands investing, does the research and is happy to spend some time working at it. If you make the wrong investment choices, you've only got yourself to blame, so you must feel comfortable managing your own investment portfolio and picking your own investments.
Aside from the state pension from the Government, there are two different types of pension; a private pension and an employer pension. A SIPP falls under a private pension, as it's something you set up yourself. However, whether you need a SIPP may depend on whether you already have an employer pension. With an employer pension the company you work for will likely contribute to your pension as well, so it's a no-brainer. See the Pensions MoneySaving guide for other pensions options.
If you've already saved into a SIPP and want to know how you can take your pension money, then you'll need to read our Guide to Taking Your Pension 2018.
Only you can know that. But if having greater investment choice and flexibility isn't important to you, and your contributions are going to be low, then the answer is probably ‘no’.
Even if you do think investing in a SIPP is right for you, what it comes down to is risk appetite.
Investments can go down as well as up, and you’ll be in control of riding that storm when it happens. If the thought of losing money on your investments will keep you up at night in a cold sweat, then it’s probably not for you.
If you want to give it a go, but want to take a more cautious approach, there’s nothing stopping you from running a SIPP alongside a more traditional pension or company scheme – just do it with a portion of your pension savings, and keep the rest elsewhere.
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.
There are two type of SIPPs
There are two type of SIPPs – which 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:
Unit trusts and OEICs are the most common type of fund. They are forms of shared investments that allow you to pool your money with other people and invest in world stock markets.
They're 'open ended' which means there's no limit to the size of the fund, units are 'created' or 'destroyed' to meet investor demand.
Shares offer a way of owning a direct stake in a company. Their value rises and falls in line with the company's performance and general market conditions.
So if the company you've invested in is doing well, your shares in that company will be worth more. There's often an expectation of future performance built into share prices too.
ETFs are traded on the London Stock Exchange or other European markets. A relatively recent addition to the investor's toolbox, ETFs track the value of an index (such as the FTSE 100, or the price of gold) relatively cheaply.
An index is simply a tool that tracks the share price of a number of companies traded on stock markets around the world. For example, the FTSE 100 tracks the 100 largest companies listed on the London Stock Exchange.
Investment trusts are the oldest form of collective investment. Collective investments are where you invest your money alongside a group of other investors. By doing so you're able to reduce your risk by spreading your investments more widely than would be possible if you invested in assets directly.
Investment trusts are traded like shares on the London Stock Exchange. Unlike unit trusts, they are 'closed ended', so you can only buy shares from an existing investor.
A bond is a loan you make to a company (called a corporate bond) or government (called a gilt) to help it raise funds. In return, you'll get a steady income from the company or government, plus the initial sum you lent it back at a fixed date.
You can simply invest cash in your SIPP. A lot of people will do this as they get closer to retirement and want to limit their risk exposure. However, rates are often poor and typically worse than regular savings accounts. They typically vary from 0.1% up to 0.5%. If you're going to keep money in cash, check the rate.
Probably not advisable for first-time SIPP investors. You can invest in commercial property – such as offices or shops – in some SIPPs.
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:
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.
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.
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.
- New contributions
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:
Do this and it’s important to understand when you withdraw cash you get 25% of each lump sum you withdraw tax free. Eg, if you had £100,000 and took £20,000 out you’d get £5,000 of it tax-free, the rest would be taxed at your current rate.
This is a product you buy that keeps the rest invested so it can still hopefully grow, but you can also use it to take income when needed.
The tax here is different, you get the first 25% you withdraw tax free and then the rest is taxed when you take it – which could be useful if you’re likely to be in a lower-tax bracket once you’re older.
This gives you a guaranteed income each year for the rest of your life.
You could also choose to do a combination of all of the above. There are different charges on all of these, and it’s important to check them out and always compare different providers.
For a full breakdown of all the options see our Guide to Taking Your Pension.
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 example, £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.
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.
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.
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SIPP best buys
Below are our top picks for opening a SIPP. Which one is best for you will depend on how much money you're going to have in your SIPP.
When picking our best buys, we've also taken into consideration charges for taking the money back out of your pension when you gain access to it – something which could eat a large chunk of your money if you're not careful.
If you know you're not going to have a large pension, AJ Bell might be a good option for you. It has a tiered annual management charge for funds of 0.25% for £0 - £250k, 0.10% for next £250k - £1 million, 0.05% for next £1 million - £2 million and no charge over £2 million.
It has an annual charge of 0.25% for shares (max £25 per quarter). Buying and selling funds costs £1.50 per trade and shares ranges up to £9.95, depending on how many trades you make.
If you're investing more than £50,000, then its charges do start to eat up more of your money, so you'd be better off going for a platform such as Interactive Investor below.
For a full list of charges and how much it costs to take your money out of the SIPP, see AJ Bell's list of charges.
- Annual charge for funds: 0.25% (£0-£250k), 0.10% for next £250k-£1m, 0.05% for next £1m-£2m and no charge over £2m
- Annual charge for shares: 0.25% (max £25 per quarter)
- Buying/selling shares: £9.95 or £4.95 if 10 or more share deals in the previous month, or £1.50 for regular investments online
- Buying/selling funds: £1.50
- Transfer-out fee: £25 per holding
Hargreaves Lansdown* ticks different boxes to Interactive Investor below. Its percentage-based annual charges for trading in funds and shares mean that, for some with larger portfolios, a big chunk of their investment will be swallowed up by charges.
However, for smaller investors and beginners it could be a good fit. Hargreaves is renowned for its level of service and has ready-made portfolios for those who don't want to take charge of their investment decisions.
Although Hargreaves charges a bit more on the way in, it has some of the lowest charges for taking your pension – charging no fees for flexible or capped drawdown, or taking small lump sums from your pension.
Look at Hargreaves Lansdown's SIPP charges to weigh up if it might be the right option for you.
- Annual management charge: £0
- Annual charge for funds: 0.45% (0-£250k), 0.25% (£250k-£1m), 0.10% (£1m-£2m). No charge over £2m
- Annual charge for shares: 0.45% (max £200)
- Buying/selling shares: £11.95 (0-9 deals), £8.95 (10-19), £5.95 (20+)
- Buying/selling funds: £0
- Transfer-out fee: £25 per holding
Interactive Investor charges a flat fee of £100/yr + VAT in administration charges for managing your SIPP. As it's a flat fee rather than a percentage of your investment, this is a good option for those with larger portfolios, above £50,000.
There's also a £22.50 quarterly fee to trade, however this covers your first two real-time trades in the quarter, so if you're planning on trading this isn't too bad. Trades on top of this are £10 each, unless you buy or sell more than 10 times in a month, then you'll pay £6 for any further trades for the rest of that month.
When looking at taking your pension benefits, Interactive Investor isn't as cheap as Hargreaves Lansdown for example, but as its charges are cheaper on the way in, you'll need to weigh up what works best for you depending on how much you're investing.
For a full list of charges, including how much it costs to take pension benefits, see the Interactive Investor charges page.
- Annual management charge: £100 + VAT
- Annual charge for funds/shares: £90 (£22.50 per quarter to use on trades)
- Buying/selling shares: £10 or £1.50 for regular investments with portfolio builder
- Buying/selling funds: £10 or £1.50 for regular investments with portfolio builder
- Transfer-out fee: Free for up to 10 holdings in year one, £15 after