Sipp: the cup of plenty?

In the past few years Self Invested Personal Pensions (SIPPs) have grown in popularity. They have progressed from a relatively niche product for wealthy investors and business owners seeking to invest in their company premises, to a mainstream product for the mass affluent. The main surprise is that it took so many investors (and their advisers) so long to catch on.

SIPPs allow individuals to invest their pension fund assets in a variety of different asset classes such as agricultural land, shares, deposits, futures, options and venture capital. Indeed, all types of property are allowable, but residential property and tangible, moveable assets such as works of art, are heavily taxed.

In practice an individual may disengage their pension from the product provider (the scheme administrator) to a greater or lesser extent as dictated by their circumstances and the type of SIPP they are invested in. For example, a business owner can direct his SIPP to purchase his company’s premises, with the SIPP itself undertaking borrowings if necessary, and benefit from tax favoured rental income. The same SIPP can also invest in a discretionary managed portfolio of stocks and shares, collective investments, private equity, structured products and any other permitted investment. This is a far cry from the 1980’s when investment choice was restricted to the with profit fund and a handful of alternative investment options managed in a provincial insurance company office.

A SIPP’s potential is perhaps fully reached when an individual reaches a nominal retirement age, when benefits may be drawn. Note that these days actual retirement is not the prerequisite that it once was. For many, a SIPP is the perfect vehicle for Income Drawdown which enables investors to defer the purchase of an annuity and draw variable benefits as required according to their personal and family circumstances. It is important to note that this strategy is not suitable for everybody and should generally only be considered by individuals with significant accumulated pensions and other assets.

Appropriate advice is important as not all SIPP contracts will accept the full remit of allowable investments within the rules. Charges also tend to increase for more complex and sophisticated investments and, with some plans, there is a danger that individuals may end up paying for services that they do not utilise. It is therefore advisable to seek advisers who are familiar with this area of planning.

With the right guidance, SIPPs are extremely attractive for individuals with pension pots big enough to benefit from widely diversified assets and sophisticated investments; and those that wish to use their business premises within their pension.

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