Self Invested Personal Pension & Small Self Administered Schemes (SIPP and SSAS)
What is a SIPP?
A Self-Invested Personal Pension (SIPP) is a pension ‘wrapper’ which can hold investments until you retire and start to draw a retirement income. It is a type of personal pension and works in a similar way to a standard personal pension. The main difference is that with a SIPP, you have more flexibility with the investments you can choose.
A SIPP pretty much, “tells you what it does on the tin.” ‘Self-Invested’ explains very clearly that the pension fund may be controlled by the owner of the fund, not a faceless, overpaid fund manager sitting in an ivory tower in London. A SIPP is just another type of pension however, it is my opinion that they could be renamed as the hidden ‘United Kingdom Tax Havens’. If this was the case, I would imagine many more people would read about them, to find out why they stand head and shoulders above any other form of legitimate, legal and potentially low risk investment.
SIPP’s allow the holder to accumulate a ‘pension pot’, to build up value in a virtually tax free environment. A SIPP allows individuals to reduce income tax paid on their tax returns each and every tax year. Eventually, the SIPP can provide a ‘tax free lump sum’ know as a ‘pension commencement lump sum’ (PCLS). The pension holder can withdraw as much as 25% of the pension value as a ‘PCLS’, whilst the rest of the SIPP can continue to accumulate growth tax free. The remaining pot can provide either ‘flexible-access income drawdown’, or further ad-hoc lump sums, both of which can be classed as ‘potentially taxable’ withdrawals.
As with other pensions, SIPP’s also offer the benefit of tax relief. Every pension contribution paid by an employee or employer should qualify for corporation or income tax relief of 20% for basic rate taxpayers up to 45% for additional rate taxpayers. Where else will the UK Government provide you with a 20-45% guaranteed bonus on your savings contributions overnight? Nowhere!
Although SIPP’s clearly have their benefits, these pensions are not for everyone. It is recommended that you seek financial advice from a professional financial adviser to assess which types of pension.
How a Self-Invested Personal Pension works?
With standard personal pension schemes, your investments are managed for you within the pension fund you have chosen. SIPPs are a form of personal pension which provide individuals with the freedom to choose and manage their own investments. This ‘freedom’ is designed for people who want to manage their own fund by dealing and switching their investment decisions when they want to. SIPPs provide the ability to buy and sell investments within a pension, just as you would in an ISA or GIA. The only drawback being, SIPPs sometimes have higher rate of dealing charges than other personal pensions or stakeholder pensions.
For these reasons, SIPPs tend to be more suitable for large funds and for people who are experienced in investing. Or an alternative option is to pay an authorised investment manager to oversee your SIPP and make the investment decisions on your behalf.
What are your investment options?
Most SIPPs allow you to select from a range of assets, such as:
- Individual stocks and shares quoted on a recognised UK or overseas stock exchange
- Government securities
- Unit trusts
- Investment trusts
- Insurance company funds
- Traded endowment policies
- Deposit accounts with banks and building societies
- National savings products
- Commercial property (such as offices, shops or factory premises)
These aren’t all of the investment options that are available – different SIPP providers offer different investment choices.
It’s unlikely that you’ll be able to invest directly in residential property within a SIPP. Residential property can’t be held directly in a SIPP with the tax advantages that usually accompany pension investments. With a few exceptions and subject to some restrictions, including on personal use, residential property can be held in a SIPP through certain types of collective investments, such as real estate investment trusts, without losing the tax advantages. Not all SIPP providers accept this type of investment though.
What is a SSAS?
A Small Self-Administered Scheme (SSAS) is a standalone occupational pension scheme that are generally designed to give the employer additional investment flexibility to a SIPP. A SSAS is run by a group of trustees, who are often members of the scheme itself. When managed correctly and without disregarding the specific circumstances of individual members, a SSAS can provide the widest range of flexibility achievable with a private pension.
The SSAS is usually created for directors and key employees of small private companies who desire exclusivity and some additional benefits within an occupational scheme environment. SSAS’s can be open to all employees and their families however, as of 2020, a SSAS must have a maximum of 11 members.
There are some subtle differences to considering a SSAS compared to a SIPP. For example, where a SIPP can provide an individual with complete control over their own portfolio, a SSAS is controlled by the trustees of the scheme and investment decisions must be agreed by the group. Furthermore, the upfront costs of a SSAS are usually greater than that of a SIPP, primarily because greater levels of flexibility require additional maintenance and advisory costs.
NOTE: A SSAS is not a product that is regulated by the Financial Conduct Authority.
Is a SSAS right for you?
A SSAS may be appropriate for your circumstances if:
- You have individual/combined funds in excess of £200,000. That is, the intended members of the scheme’s combined pension fund value.
- You are considering ‘pooling’ your pension wealth with business partners or family members.
- You are interested in loaning money from your pension to your limited company.
- You are considering purchasing a commercial property.
As with SIPP’s, though there are many benefits, SSAS’s are not suited to everyone’s needs. Before making any decisions, it is recommended that you seek financial advice from a professional financial adviser to better understand your available options.