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The Attractions of a Self-invested Pension

Jun 14, 2008
One of the reasons for searching out the services of an independent financial adviser is that pension matters are awash with esoteric terms, labels and descriptions. The self-invested pension - or Self-invested Personal Pension (Sipp) as you'll often see it called - is a good case in point. The underlying principle is relatively straight forward and attractive, but to make the most of the opportunities it represents, it really is essential to take expert advice especially if you are considering transferring to a self-invested pension from an existing pension scheme.

What it is?

A self-invested pension shares the same basic features as any personal pension plan regarding such things as eligibility, contributions and tax relief. Instead of pension contributions being paid into an insurance policy investment however, the self-invested pension remains very much in the hands of the pension holder, even when it comes to making the investment decisions. For example, the holder can choose to invest in anything from individual shares to unit trusts, gilts, traded endowment policies, residential or commercial property and even investments in art or vintage wines.

In other words, it is the pension holder (or his financial adviser) who can make the investment decisions, rather than being tied into the insurance company's investment portfolio in a conventional personal pension plan. If the self-invested investments are not performing as expected, therefore, it is a relatively straight forward matter of switching to higher-performing investments.

Provided you earn more than 30,000, you can also operate a self-invested pension alongside a regular occupational pension.

As with all other personal pension plans, you will not be able to draw on a self-invested pension plan until you reach the age of 50 (or 55 after the final implementation date of April 2010). Until retirement age, however, you will be allowed to contribute to your self-invested pension as much as the equivalent of a year's salary, less any contributions you might be making to any other pension plans. As with other personal pension plans, you earn tax relief on your contributions. Effectively, therefore, for every 1,000 that is invested, you only pay 780, with the remaining 220 being paid by the Inland Revenue in the form of basic tax relief.

Self-invested pension plans have also become rather more accessible these days to a wider number of people. It is possible to set one up, for example, with a monthly contribution as little as 50, or if you are transferring from another pension, a transfer value of as little as 5,000.

Summary

A self-invested pension puts more of the investment decision cards in your own hands. You can keep a personal control over the investment strategy or appoint a financial adviser or fund manager to make the investments for you.

For those who want an active, hands-on approach to their pension management, there will be decided attractions in a self-invested pension. Nevertheless, as emphasised previously, the decision to set up a self-invested pension or to transfer funds to one from an existing pension scheme should not be taken without first consulting an independent financial adviser.
About the Author
Steve Wright is Managing Director of Wrightway Financial Consultants, Independent Financial Advisers specialising in Pensions, Investments, Mortgages and Insurance. One of their major areas is self invested pension .
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