What is a SIPP? SIPPs Explained
A self-invested personal pension (Sipp) is a type of pension in which the individuals are allowed to make their own investment decisions, with a large degree of flexibility. This DIY pension is approved by the UK government and is effectively a tax wrapper.
A Sipp receive the same tax relief as personal pensions, but can be invested in a range of more specialised financial instruments, like physical gold. They can also be used to purchase commercial property for use in a business; money can be borrowed in a SIPP (up to 50% of fund value) in order to make such a purchase.
Sipps were introduced in 1989 and are very popular in Great Britain. It works by adding a percentage to an individual’s marginal tax rate based on their contribution. It allows a variety of marginal tax rates, as high as 45%. So, for example, if someone is contributing £3,000 and their marginal rate is 40%, the government will add £1,200, making the total contribution £4,200.
It is important to consider the costs of owning a SIPP, which are generally much higher than in a regular personal pension scheme, and are almost always higher than a stakeholder scheme. Administration charges, annual management charges and trading costs all add up, and can put a serious dent in the value of a SIPP.
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Category: Financial Glossary