SIPPS - Self-Invested Personal Pension
Much like any investment, a SIPP is not for everybody, therefore in this article we look and the key considerations that any investor should factor in before transferring any pension to a SIPP, including the opportunities and drawbacks SIPPs offer and how to evaluate whether a SIPP pension transfer is a sensible option.
The information contained in this article is for information only and should never be used in isolation to decide about transferring your pension to a SIPP. You must always seek independent advice from a qualified advisor before making any investment decision.
What is a SIPP?
A SIPP is a self-invested personal pension scheme that enables the holder to make decisions about the investments held within the wrapper. SIPPs offer the same tax advantages as other UK pension schemes, however the three major benefits of SIPPs are that they normally offer:
a greater variety of investment options within the SIPP
potentially reduced management costs
more control over what happens within your pension
UK residents can easily open a SIPP using an online investment platform and can normally start making contributions immediately. For non-residents the rules around contributions will differ depending on the SIPP provider, but it is common for SIPPs to only allow non-residents to make contributions to their SIPP if they were previously resident in the UK within the past five tax years.
Once the SIPP is open, you can also transfer funds from any/all other personal pensions, regardless of whether you are a UK resident or not.
Reasons to consider transferring existing pension funds a SIPP
As previously mentioned, there are a number of potential benefits to transferring existing pension funds into a SIPP (primarily increased control, reduced costs and increased flexibility). However, these are not the only reasons why an investor might wish to consider a SIPP, below we look at the major reasons:
More investment options
Within a SIPP you will be able to invest in a wider range of investment options including trusts, international stocks/shares, properties, bonds (including offshore bonds) as well as structured products. The actual availability will depend on each provider.
In some cases, the investments are designed for sophisticated investors and are not normally available on the high street, therefore before making any decisions, it is imperative that you ensure you fully understand the investments and the potential risks.
You must always be careful to ensure that any investments being advised within the SIPP are suitable for you.
Transferring pension(s) into a SIPP can often lead to significantly reduced costs as the overall charges are reduced (some providers even provide the pension wrapper for free), however you must also be aware that the costs of the underlying investments may be higher.
Consolidation of pension schemes
Transferring and consolidating some/all of your pension schemes into a single SIPP means that you have all of your pensions in a single place. This ensures that you can keep an eye on the performance as well as simplifying the management (for example if you were to move home).
Ideal for non-residents planning to return to the UK
As SIPPs are recognised in the UK, for non-residents intending to return to the UK at any point in the future, your SIPP will continue without any potential issues. Once you return to the UK you simply use your pension as per any other UK resident.
Problems with your existing pension provider
You may wish to consider transferring your pensions if your existing pension provider is facing problems (such as an under-funded final salary scheme), potential closure or it might not available to residents of particular countries.
Potential risks and issues when transferring funds to a SIPP
Fees and exit penalties
If you are looking to transfer funds out of an existing personal pension, you must be fully aware of any potential fees or penalties that may apply. This is especially true if you are considering transferring funds from a QROPS into a SIPP where the investments may have a back end load – most common if you paid no fees up front.
Always ensure that you are aware of any exit penalties – any potential gains from transferring your pension could be wiped out.
Loss of existing benefits
If you were in a scheme which offered benefits to stay, a new SIPP may not offer such benefits, so ensure you are aware of any reduction in benefits. One such benefit could be like additional tax free allowances above the normal 25%.
Increased personal risk
With the increased control and investment options comes increased risk to the investor. Whereas UK pensions are subject to strict rules and regulations regarding how they are managed, once the investor takes control with a SIPP, the investor also accepts that they will be fully responsible for any gains and losses that may occur.
This can be mitigated to a certain degree by working with an experienced independent financial advisor who can help you manage your SIPP. While this might increase the cost through the advisor’s ongoing advisor fee their experience could be invaluable in ensuring that your investments meet your required performance requirements.
Potentially decreased value of any defined benefit scheme
A defined benefit scheme carries benefits such as guaranteed income amounts on retirement as well as future benefits for your spouse or family in the event of your death. In some cases, it will be very difficult to meet the realisable value of a defined benefit scheme and any transfer must be evaluated with regulated advice. If your defined benefit scheme is in excess of £30,000 it is a legal requirement to seek independent advice before conducting any transfer.
Restrictions on non-resident contributions
While non-residents can transfer pension funds into a SIPP, there may be limitations on how much you can contribute. Similarly, some SIPPs will not be available for residents of certain countries. For example, residents of the United States will find that many SIPPs will not be available to them and advice should be sought about the best course of action.
Reduced tax benefits in some countries
While you pay tax in the UK you will also benefit from tax relief in the UK. However, non-residents will not be able to claim this tax relief and SIPPs themselves are often subject to no tax relief in other countries. Always ensure that you fully understand the local restrictions and tax implications of your investments before making any decision to open a SIPP and/or transferring pension funds.
Request a free introductory consultation to explore your options
If you are considering your pensions options and you would like to understand more about your suitability for a SIPP, it is always best to seek independent advice first.
We offer a free introductory consultation with hand selected independent advisors in our network that are both qualified and experienced in assisting UK residents and non-residents with their pensions and retirement plans.
To request your free consultation, simply submit your details using the form and within 24 hours you will be connected to an independent advisor from our network who will be in touch to arrange a suitable time for your consultation.
During the consultation they will be able to answer your general questions and be able to offer preliminary guidance on your situation. Following the consultation, if you want them to conduct further analysis, including reviewing your existing investments, developing a risk profile and offering more detailed advice, they will provide you with an overview of what they offer and the potential fees and charges. You can then decide with to proceed or not, without any obligation.
Request a free consultation
If you would like to discuss the pros and cons of transferring your pensions to a SIPP, or your retirement plans in general, submit your details using the form to request a free introductory consultation with an independent advisor from our network
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