SIPP pensions have a number of advantages over more basic personal pension plans.
One of the major benefits is the greater amount of control and flexibility they offer.
Savers are given the option of choosing and managing their own investments with the help of an independent financial adviser.
SIPPs: extensive range of investment options
Unlike conventional pension schemes, SIPPs offer an extensive range of investment options (there are many types of financial asset can be invested in a SIPP). They also provide investors with tax-efficient savings for when they retire, and offer a greater choice of pension benefits for their dependents or spouse when they die.
In addition, a person who takes out a pension scheme with an insurance company who have badly performing funds will be charged a fee to close that scheme and switch to another company.
However, with a SIPP contributions can simply be redirected to a better performing fund.
Consolidation – Pension transfer
Another major advantage of a SIPP is that it allows people to transfer any existing pension schemes and investments they may have into one pension fund. This is why a SIPP is sometimes refereed to as a pension wrap or wrapper.
By consolidating their retirement savings in one place, savers can benefit from easier management of their investment portfolio and reduce the charges associated with their other pension plans. There are also companies who provide improved terms for larger pension fund investments.
Before any transfers are carried out, it is important for people to check whether there are any valuable benefits in the existing schemes that would be lost on transfer. The costs of transferring must also be taken into consideration.
SIPPS offer increased tax benefits on contributions than most traditional pension plans. Basic rate tax relief of 20% applies to any contributions made into a SIPP. This means that basic tax rate payers who wish to invest £10,000 in a SIPP only need to contribute £8,000 in the current tax year as the remaining £2000 (20%) will be topped up by the taxman (Inland Revenue). The same applies for monthly contributions.
Current government income tax bands
| Tax year 2016-17 | Tax year 2017-18 | |
|---|---|---|
| Basic rate | £0-32,000 | £0-33,500 |
| Higher rate | £32,001-150,000 | £33,500-150,000 |
| Additional rate | Over £150,000 | Over £150,000 |
Tax relief on employer pension contributions
Contributions to your SIPP can also be made by your employer, even if you do not make any contributions yourself. Any employer contributions to the SIPP are paid gross, or in other words tax-free. However, there is no tax relief on transfers from other pension funds into your SIPP.
Tax relief on employee pension contributions
Companies usually take the pension contributions from their employee’s pay before deducting tax (but not National Insurance contributions).Tax is only paid on the pay that’s left, so whether you pay tax at basic or higher or additional rate you receive the full relief straightaway.
However, some employers use the same method of paying pension contributions that personal pension scheme payer’s use, whereby income tax is taken on your earnings before any pension contribution, but the tax is claimed back from the government by the pension provider at the basic rate of 20 per cent.
Higher rate payers can claim the difference through their tax return or by telephoning or writing to their tax office, while additional rate taxpayers must claim the difference through their tax return.