How to Understand a SIPP

The acronym SIPP stands for Self-Invested Personal Pension Plan. Sales of SIPPs have rocketed to almost £3.5 billion since they were introduced. Follow these steps to learn their benefits and tax implications.

Difficulty: Moderately Easy

Instructions

1. A SIPP is a pension investment plan available to anyone of any age. The investor does not have to be a resident of the UK or employed in the UK. The money you put into a SIPP is invested by yourself in whichever stocks and shares you choose.

2. Benefits of a SIPP. Think of your SIPP as a giant basket into which you are placing your own items and additional free items from the government. If you pay 40% tax on part of your income and place £1000 into your SIPP, then the government will give you back £400. However only relevant UK individuals are entitled to tax relief on contributions.

3. Flexibility is key. A SIPP is one of the most flexible pension plans available. You decided how much involvement and control you want to exert over the SIPP regarding investment decisions. You can check online and see how your investments are performing.

4. Other benefits of a SIPP. Any money that you make on your investments are free from Capital Gains tax. When you retire, 25% of your SIPP can be paid in a lump sum. You also access your pension plan from the age of 50, although from 2010 this age will rise to 55.

5. How to start a SIPP. Contact a financial advisor to find out which SIPP will suit you best. Many investors will simply transfer their existing pensions into a SIPP. You may find that the minimum monthly contributions will as high as £300. The monthly contributions may vary depending on the financial provider you deal with.