What is a SIPP (Self-Invested Personal Pension)?

A Self-Invested Personal Pension (SIPP) is a type of government-approved personal pension scheme that permits individuals to make their own investment decisions from the full range of HM Revenue and Customs (HMRC) approved investments, rather than leaving a pension company to make the decisions.

Pension Benefits

The amount of pension benefit at retirement will depend on:

• How much has been contributed to the fund.
• How well the investments have performed.
• What charges have been made by the SIPP provider.
• The type of annuity chosen.
• Annuity rates at the time of retirement.

A tax free lump sum can be taken from the SIPP, plus an income between the ages of 50 and 75 (the minimum age at which benefits can be taken will increase to 55 in 2010).

SIPPs and Investment Choices

In common with other personal pension schemes, SIPPs act as a tax 'wrapper', allowing tax rebates on contributions in exchange for limits on accessibility. However, although they have the same tax benefits as a standard personal pension, they have a far more flexible approach to investments, with the holder of the plan filling the 'wrapper' with permitted investments of their own choice, thus giving them control over the investment strategy.

It is possible to hold a wide variety of investments in a SIPP, from commercial property and investment funds to shares, bonds, gilts, futures and options. On retirement, the holder of a SIPP can defer buying an annuity, and can draw down an annual income, whilst still retaining an investment fund.

Who Are They For?

Any UK resident or a Crown servant (or the spouse or registered civil partner of a Crown servant) who is under 75 years of age may purchase a self-invested personal pension. However, due to their wider investment freedom and greater flexibility, SIPPs have higher risks than standard pension plans and require active investment management and investment advice. Until recently, they were only feasible for those with very large pension funds, as charges connected to this type of scheme tended to be so high; however, increasing competition over the last few years has brought costs down and made them more accessible.

How SIPPs Are Run

Depending on the SIPP provider, the scheme will have at least a provider, administrator and, under trust-based schemes, a trustee. Unlike standard personal pensions, where the provider of the pension has ownership and control of the assets, and acts as trustee, in a self-invested personal pension, the member may have ownership of the assets (via an individual trust) as long as an approved administrator is appointed to carry out investment transactions. For SIPP contracts written under trust, the trustee controls the investment under instruction from the member.

The trustee owns the assets in the SIPP; sales and purchases are made in the trustee's name, so that any transactions enjoy the tax-protection of the SIPP. The official administrator of the scheme reports to HMRC (for example, when claiming tax relief on contributions), whilst a scheme administrator carries out the day-to-day running of the SIPP (e.g. collecting and recording any contributions made to the SIPP). This means that it is possible to change the investment manager that looks after the fund, without incurring fees for changing the administrator who looks after the day-to-day running of the scheme.