A Self Invested Personal Pension (SIPP) is an investment wrapper that gives investors a greater deal of freedom about investment choices in comparison to other pensions. With a SIPP, the investor is in full control of where their money is invested and how their pension performs. This is in strong contrast to standard pension schemes in which investments are managed for investors within the pooled fund that has been selected.
Investors under the age of 75 can pay into a SIPP, even parents are able to open a Junior SIPP for their children. However, it is important to understand that any money invested in a SIPP will be locked away until the recipient reaches 55 years old. Once the age of 55 is reached, an investor is able to commence withdrawals – typically 25% tax-free and the remainder subject to income tax. Options at this stage include take all the cash in the one lump sum, smaller regular sum withdrawal or conversion into regular income products such as an annuity or draw down.
SIPPs are also offer tax benefits, as with other pensions. In a basic example, for every £8000 an investor contributes to a SIPP, the government pays in £2,000. Higher rate tax payers also have the added advantage of more tax relief.