Often abbreviated as SIPP, the self-invested personal pension is something of a ‘wrapper’ for an individual’s pension which looks after retirement investments until the pension income is accessed upon retirement. The mechanics of the SIPP are to a large extent similar to those of the standard personal pension, though differ in the fact that with the former, the policy holder has a great deal more control and can choose their investments more proactively.

How It Works

In the simplest of terms, when and where you have a personal pension plan, all investments and thus the overall outcome are managed on behalf of the policy holder. With a SIPP, it’s the policy holder that gets to control and choose their preferred investments.

Some pension holders are happy to have things managed on their behalf – those with the intention to swap, change and manage their own investments may find a better deal in a SIPP. While SIPPs tend to attach weightier fees and charges, they also have the potential to bring about greater returns – thus come more highly recommended for those with more money to invest.

What You Can Invest in

What the policy holder can invest in varies in accordance with the SIPP taken, but most will allow access to:

  • Shares and stocks listed on a stock exchange in the UK or abroad
  • Government securities
  • Unit trusts OEICS and UCITS
  • Investment trusts
  • Insurance company funds
  • Traded endowment policies
  • Deposit accounts with building societies and banks
  • Certain National Savings and Investment products
  • Commercial property

This list is far from exhaustive and varies significantly in accordance with the options offered by the SIPP provider.

Drawing Pension Benefits

A SIPP is a money purchase scheme, wherein the benefits you can expect to receive upon retirement hinge on a variety of factors, including:

  • The total contributions you have made throughout the policy period
  • How long the investments have been in place
  • How the investments have performed
  • Any applicable fees and charges

As it stands, the government permits retirement benefits to be accessed and used by anyone aged 55 or over, with there being no requirement to cease working in order to do so. As much or as little can be accessed and withdrawn at any one time, with a maximum of 25% of the funds being offered tax-free.

A variety of options and personal circumstances will determine how much income is received. You could for example choose for your income to continue being paid after you die, or for the income you receive to be paid on a more frequent/infrequent basis to suit your lifestyle.

In terms of how retirement income can be paid out, two of the most popular options include taking out an annuity and income drawdown.
Income tax applies to pension income – National Insurance does not.

Small Self-administered Pension (SSAS)

Small self-administered pension schemes are defined contribution pension wrappers that are employer-sponsored and enhance flexibility of investment options for employers.

How They Work

Usually established for key staff, senior executives, directors and so on, the SSAS is designed to bring additional retirement benefits to comparatively small groups of people – usually a maximum of 12. Family member of employees are also usually permitted to join an established SSAS, even if they aren’t employed by the company.

Pension providers and insurance companies often offer SSAS options, with the scheme itself usually being run by its members.

What You Can Invest in

Enhanced flexibility with regard to investment options and investment control represents the single biggest benefit of taking part in an SSAS. Along with all the various investment options available to those choosing a SIPP, an SSAS allows for investments to be made in the shares of the respective company – terms and conditions do however apply.

Drawing Pension Benefits

What’s different about the assets with the SSAS is the way in which members are not assigned individual pots – the funds are instead cumulative. However, each member of the scheme is allocated a set proportion/percentage of the total cumulative pot.

As with other pension funds, legislation states that SSAS benefits can be withdrawn upon reaching 55 years of age. In terms of the benefits to be expected, value will be determined in accordance with a variety of factors including:

  • The total amount that has been paid into the SSAS
  • How long each investment has been active
  • Any growth in the investments during the active period
  • Fees, charges and additional costs incurred

More often than not, you’ll be able to decide where you access the funds in the form of a lump-sum cash payment and reduced income, or as income only to be paid on a regular basis. If you choose to take out the funds as cash, you will be entitled to 25% of what you take out tax-free – the rest being taxed in accordance with the applicable income tax rate.

Depending on your personal circumstances and the options available to you, both of the above-mentioned options could be extremely rewarding. Speak to an independent financial advisor for more information on the pros and cons of the available retirement plans.