A SIPP is a self-invested personal pension, and one reason to get very excited about saving for retirement.
SIPPs provide the same tax benefits offered by other types of pension schemes. A basic rate taxpayer will get their 25% rate tacked onto any SIPP deposit she makes, so thanks to the HMRC, £8,000 will magically become £10,000. The same amount invested by a higher-rate taxpayer will provide an additional £2,000 in tax relief, which you can claim by filling a self-assessment tax return after the end of the tax year, effectively turning her £6,000 into £10,000. By the same impossibly ornate taxation principles, the top-rate taxpayer who pays at a rate of 45% can effectively turn as little as £5,500 into £10,000.
The main difference between a SIPP and the kind of traditional pension fund administered by an employer is investment freedom. Whereas your employer will offer you very limited, if any, choices, on how your retirement funds will be invested, with a SIPP, you’re the boss. You could invest in any stocks and bonds you like. Maybe you’ll prefer the diversification of ETFs and mutual funds.
It should be noted that SIPPs have both an annual and a lifetime contribution limit, or “allowance.” For the 2018 tax year, the annual allowance is £40,000 and the lifetime allowance is £1.03 million.
What we do recommend at Wealthsimple is the same game plan that we suggest to all investors who plan to have their money stay put for any long period of time — a diversified portfolio of ETFs that mirror the performance of the overall stock market. Because they are not actively managed by a fund manager, these so-called “passive investments” boast much lower management fees than unit trusts, and in the long run, have been shown to outperform the vast majority of actively managed funds.