The Benefits and Drawbacks of Investing in SIPPs

Taking control of the financial cushion you build up for your later years is important for ensuring long-lasting quality of life.

With the pension market rules having changed significantly in recent years, there are now more options for managing your own pension and the Self Invested Personal Pension (SIPP) has become a popular choice. You may be wondering if you should consider a SIPP for your pension and what its advantages and disadvantages are.

For a quick overview see the summary answer at the top of the article, or read on for all the details as we walk you through the most important points to consider to help you understand the benefits and risks as you decide if it’s worth investing in a SIPP.

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In summary: What are the advantages and disadvantages of a SIPP?

Whatever your later life savings goals and aspirations, a SIPP can help you get to where you want to go. However, you’ll want to make sure you’re properly clued up on SIPP retirement benefits and disadvantages before you make a final decision on which pension is right for you. Here’s a quick overview of some of the main benefits and drawbacks of a SIPP pension, which we expand on in the article below…

SIPP advantages

  • Invest both regular and one off payments
  • Take control of what you invest in
  • Enjoy at least 20% and up to 45% tax relief on your savings
  • Guaranteed funds invested until you are at least 55 years old
  • No age restrictions to when you can open a SIPP
  • You can pay into a SIPP until age 75
  • Options for passing on some of your wealth inheritance tax free
  • Withdraw up to 25% of your SIPP fund tax free
  • Options for how to withdraw your pension are flexible

SIPP disadvantages

  • Limits on how much tax relief you can get from SIPP savings
  • Risk of paying extra fees for SIPP’s wrapper & underlying investments
  • Money is locked in until age 55 or older
  • Pay taxes on lump sum withdrawals above 25% of your SIPP fund
  • Self-managing your investments could mean poor investment decisions

SIPP benefits and risks

A SIPP pension puts you in the driver’s seat of your retirement and pension savings goals, however, it brings both benefits and risks.

Although a SIPP ensures your money is stashed away for later years, it also means less flexibility on when you get to withdraw your investment.

A SIPP brings significant tax relief on savings but any money withdrawn beyond 25% of your savings pot will be subject to taxes. And while you get to decide where you place your investments, this could also mean your savings are subject to greater risk.

Read on for further details to help you understand whether a SIPP might be right for you, or make an enquiry and talk to one of the pension experts we work with for bespoke advice and if a SIPP would be a good idea for your retirement planning.

Should I get a SIPP?

Taking out a SIPP is an attractive option for those looking to self-manage their pension. The ability to manage your own investments and invest as much and when you like (subject to some restrictions) presents an opportunity to grow your savings according to your risk appetite.

Which pension to take out and how to manage it is one of the most important financial decisions you will make, so the question of whether or not you should start a SIPP is one you should carefully consider and get expert advice on.

What are the advantages?

A SIPP works like a standard personal pension but gives the holder more flexibility and control over their investments.

There are many advantages you’ll gain from a SIPP, some of these include:

  • Flexibility over when and how much you invest in your pension.
  • Control over which investment vehicles to choose.
  • The ability to earn returns according to your level of investment risk.
  • Tax efficient – the government will match your savings with pension relief.
  • SIPPs are versatile investment vehicles as they can hold a range of defined assets.
  • Your savings will grow along with your underlying investments and you can choose to keep paying into a SIPP until the age of 75.
  • A SIPP gives you significant tax advantages on your savings. You’re guaranteed a 20% tax bonus and higher rate taxpayers could enjoy a further 25% deductible tax relief on SIPP contributions.
  • Up to 25% of your SIPP pension fund can be withdrawn tax free and there are flexible options for receiving regular SIPP payouts. Your SIPP could provide you with a pension through:

What are the benefits of a SIPP?

A SIPP pension gives you the benefits of great flexibility and control over your investments. It’s a tax efficient and convenient way to save for your later years: you can add to your savings when you like and the government will top up your savings with pension relief based on your marginal rate of tax.

Although it gives you maximum freedom to manage your own investments and retirement funds, a SIPP restricts withdrawing funds until you are aged 55 or aged 57 from 2028. This makes it safe as a pension savings tool as you can’t access the funds until later on in life. You can usually take out up to 25% of the pot tax free and the rest is treated as taxable income.

To get a SIPP pension that’s tailor-made to your needs, make an enquiry and we’ll connect you with an expert pension advisor who can give you whole of market advice.

What are the benefits of holding property in a SIPP?

There are a number of advantages to SIPP property purchases and they include:

  • Potentially strong capital growth: Yields on property can be higher than dividends from funds and equities.
  • Capital gain resulting from an increase in the value of the property is exempt from capital gains tax.
  • Rental income is also tax exempt as it’s reinvested in the SIPP.
  • Companies which purchase their business premises through a SIPP can potentially generate capital through the plan.

Risk warnings to be aware of

It’s also important to consider the potential pitfalls of SIPP property purchases, and they include:

  • There may be additional costs involved, such as management and maintenance fees.
  • If the deal falls through the lost sunk costs can be higher than for property transactions where a SIPP is not involved.
  • If there are rent arrears or the property becomes unoccupied, the account holder may have to contribute the lost capital to the SIPP or consider selling the property.
  • Switching SIPP providers can be more difficult as this means a change of ownership

If you’re concerned about any of the drawbacks we’ve listed here, there’s no reason to panic. Most of them may not apply to you and the experts we work with can help you safeguard your investments and minimise the level of risk involved.

What are the disadvantages?

A SIPP pension may be a fantastic investment tool, but this doesn’t mean it’s without its limitations and disadvantages, which include:

  • Strict limits on how much tax relief you can get from SIPP savings –
    • Tax relief applies to contributions of up to £40,000 per year.
  • A lifetime limit of a total of £1,055,000 applies across all your pension funds.
  • You risk paying extra fees for both the SIPPs wrapper & underlying investments.
  • Self-managing investments could bring higher risks of loss.

Despite the potential drawbacks, the experts we work with can help minimise any risk by connecting you with a SIPP pension provider who is the best possible match for you. A pensions expert can offer further guidance on how to reduce risk and whether SIPP pensions are any good for your circumstances.

SIPP pension problems

With great freedom comes great responsibility, so although being able to self-manage and control your investments may give you the opportunity to participate in higher risk investments and make a greater return, it also brings greater risk of loss.

High risk investments could mean you end up losing more than what you’ve saved. There’s a higher risk of theft, investment cons, or poor investment choices, at least with non-regulated products.

However, there are ways to reduce the disadvantages of a SIPP; one of the pension advisors we work with can help you find the right SIPP pension scheme.

This means you will be guided in your investment decisions and may be able to seek compensation if they recommend an investment that was not suited to the risk you wanted to take on.

So, is a SIPP a good idea?

Taking out a SIPP is a viable option for a DIY pension that helps you plan for long-term financial health. It can help you keep track of your pension by having it all in one place and making you an active decision maker. It also gives you tax relief that could mean your savings are worth more in the long-run than if you invested elsewhere.

A state pension is often not enough to tie people over for the course of their retirement, so it’s good to inform yourself about pension plans and whether you need a SIPP. Deciding whether a SIPP pension is good or bad for you is an important personal decision and one that should be made with consideration of your bigger picture life goals.

Talk to an expert advisor today

The expert advisors we work with can advise you on how to make use of the advantages of a SIPP and give you access to the best provider for your needs. Call us on 0808 189 0463 or make an enquiry here.

Looking for help with SIPPs?

Save time and money with an expert who specialises in cases like yours

Looking for help with SIPPs?

Save time & money with an expert who specialises in cases like yours.

Tony has worked in a vastly diverse array of areas in the pensions industry for over 2 decades. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events. Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been "Hope for the best, but PLAN for the worst", and believes that the biggest impact that an adviser can have on a client's life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they WANT their retirement to be.

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