Beginner's Guide To: Sipps

What is a Sipp?

Sipp stands for self-invested personal pension. In effect, it is just a personal pension with greater flexibility in investment.

What can I hold in a Sipp?

Regular pensions give their owners a choice of mutual funds in which to invest. Or, if they don't feel comfortable making their own investment decisions, there's usually a default option, often a fund that invests in a mix of equities and corporate bonds. In a Sipp, however, you can hold a number of other assets, notably individual stocks and shares, traded endowment policies and even commercial property. Like all pensions, any growth or income on assets in your Sipp is free of tax, and any money you pay into it qualifies for income-tax relief.

Can I put residential property in a Sipp?

No. A few years ago, the Government came close to letting people put residential property – as well as assets such as collectibles – into a Sipp. It changed its mind when it became clear that it stood to lose a large amount of tax revenue.

How much do Sipps cost?

It can cost up to £500 to set one up, although the market is now more competitive. Some providers, such as Hargreaves Lansdown, FundsNetwork and James Hay, don't charge. Dealing and management fees vary; Hargreaves Lansdown is one of the cheapest on these measures, too.

How much can I invest?

You can put up to 100 per cent of your earnings each year into a pension, up to a limit of £235,000. In your last year before retirement, you can put an unlimited amount into your pension and still claim tax relief on the whole amount. If you're not earning, you can put in up to £3,600 a year, but will still get basic-rate tax relief.

Are Sipps for me?

You need to be a sophisticated investor to exploit the flexibility. If you're just going to spread the money across a range of mutual funds, there's no need to pay the extra cost of a Sipp.