What is this SIPP stuff?
OK. SIPP is just a fancy pants name for a DIY pension. It stands for ‘self invested personal pension.’ As the name suggests, SIPPs were really invented for all those people who were fed up of their pensions disappearing into an information black hole which spewed out an unintelligible 25 page report at you once a year.
We think of a SIPP like a see-through Tupperware pension tub. And inside you are allowed to put some shares and some investment funds. You can’t put personal property in there – like a holiday house – but you can sometimes include commercial property. At that point it all gets horribly complicated at you’ll need a good financial adviser.
Pretty much every SIPP can be sorted out online. And it doesn’t have to take ages. These days you can even sort out a SIPP if you’re not a confident investor. Here’s how.
- Find your SIPP provider – this will probably be what the industry calls a fund supermarket or an investment platform. Think of these like the department stores of finance. A one stop shop for funds, shares, ISAs and pensions. For SIPPs, we like AJ Bell Youinvest, Fidelity or Hargreaves Lansdown. Have a look at our full platform review here for more detail on charges and service.
- Check out the costs. You will typically pay about 0.3% – 0.45% for the SIPP ‘wrapper’. Or the pensions tub thingy. And then you pay for the investments you stick inside it. These will range from about 0.25% to 0.8%, depending on what you pick. These days, you shouldn’t pay more than about 1.25% for an online DIY pension.
- Work out what flavour of investments to put in ‘the tub’. If you haven’t the foggiest and you need a lie-down already, then I like what we call ‘passive’ funds. These guys give you very broad exposure to a large chunk of shares in any given market – think of it like backing every horse in the Grand National. You’re not paying a posh fund manager to try and select the very top performers. This style is what we call ‘active’ funds. More expensive. When it works it’s great and when it doesn’t it’s an expensive flop.So – beginners – have think about passive funds such as Vanguard’s LifeStrategy or L&G’s Multi-Asset funds. You will just have to choose how spicy you want your option to be. If you are investing for 10 years of more you can afford to be a bit Vindaloo about it and go for what they usually describe as an ‘Aggressive’ fund. Nice name, huh!? Or dial up the % in equities with 100% being the most spicy. Anyway, read the blurb.
- Because the Government tops up any money you stick into a pension (to reward you for being good girls and boys who won’t be all needy when you’re old), they do cap their generosity. As a general guide this means you can stick in no more than £40,000 a year, so not a problem for most of us. It can’t be more than you earn in any one tax year.
- Finally, if you are well off and putting a lot into pensions, make sure you don’t get caught by the Lifetime Allowance. More than 1 million bongos in a pension at retirement and you get stung. Have a read here.
If you are moving into drawdown (ie post-retirement, taking your money out of the pension bit by bit) then have a look at some of the charges and costs here.
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