If you want to buy and sell shares in individual listed companies, then a Self Invested Personal Pension is going to be an ideal account to hold your investments.
For the vast majority of people, picking individual stocks to invest in is going to be a risky and fruitless task. It can be very hard to achieve a better investment return than the overall market and there is a chance you could lose everything if the stock goes bust.
For these people, investing in investment funds is going to be a much safer way to build their retirement savings pot.
However, I appreciate that there are those out there that enjoy the process of analysing stocks and have experience in understanding what makes a great business.
So, if you are one of these people then it’s vital you understand how a Self Invested Personal Pension can offer you the range of stocks you want and improve your returns by way of tax savings.
Even if you don’t want to pick your own stocks, a Self Invested Personal Pension is still going to be a really great way to save for your retirement.
How a Self Invested Personal Pension is different to a normal pension
A Self Invested Personal Pension, known as SIPP for short is not a type of pension you will normally be offered as part of your workplace pension saving scheme.
The clue is in the name ‘Self Invested’. It is a type of pension that is normally set up by you as an individual.
It’s a different type of pension scheme to others such as personal or stakeholder pensions that you will normally be offered through work.
The main difference being the range of investments allowed inside a Self Invested Personal Pension.
With a personal or stakeholder pension you will normally be limited to investing in the range of funds offered by the pension provider.
For example, if your personal pension was with Aviva, you would only be able to invest in Aviva funds and other fund managers selected by Aviva. You would not normally have the option to pick and invest in individual stocks.
Whereas for a Self Invested Personal Pension you will usually have the option to invest in a huge range of investment funds from the whole of the market, commercial property and the majority of listed stocks. This makes it a stock pickers dream.
There are a lot of good Self Invested Personal Pension providers out there today that offer really good online accounts and apps so you can keep on top of everything.
Also a lot of traditional online stockbroker accounts now offer Self Invested Personal Pensions.
Before opening a new account make sure you check with the provider how quickly they can process trades. If you are a very active stock trader, then you are going to want to use a provider that can carry out your instructions within minutes.
Some providers though will group all trades by different people on the same stock together and trade once a day for everyone.
You also need to be careful of the different charging structures when picking your Self Invested Personal Pension provider. The charging can be very different between different providers and picking the wrong cost options can seriously damage returns.
If you plan to be a frequent trader, then best to look for providers that offer low charges for actually buying and selling shares and instead pay a monthly administration fee.
If you are more a buy and hold investor, then paying one off buy and sell charges may be better than a higher monthly administration fee.
Other benefits of a Self Invested Personal Pension
As well as the greater investment opportunities via a Self Invested Personal Pension, the other two main benefits are the withdrawal options and the tax savings.
With most Self Invested Personal Pensions you will have the option to utilise drawdown once you reach pension age.
This means you can make withdrawals from your pension however you like.
You can:
- Take the whole lot out.
- Take a tax-free cash lump sum only.
- Make regular withdrawals.
- Ad-hoc withdrawals.
- Or mix and match all of the above.
With a personal or stakeholder pension you will normally be limited to either using the pension to purchase a lifetime income (annuity) or take it all out as a lump sum.
The flexi-access drawdown benefits with a Self Invested Personal Pension matter because it allows you to time the withdrawals to maximise the tax allowances available to you.
For example, you could phase your retirement by reducing your hours at work and then supplementing the reduction in earnings with pension withdrawals.
Or if you retire a few years before your State Pension is due you could take out more ‘taxable’ income from your Self Invested Personal Pension to use up your unused Personal Allowance.
Talking of taxes, the beauty of using your Self Invested Personal Pension for holding your individual share portfolio is that you do not pay tax on gains you make when you sell one or all of your holdings.
Outside of a pension, your share portfolio might have large gains which are then subject to Capital Gains Tax when you sell. This is not the case if the portfolio is inside a pension.
Also, any dividends earned from shares inside your pension are not subject to Income Tax whereas they are if they are held outside a pension.
If you do hold a share portfolio outside of a pension, then I’m sure you will have already tried to utilise your ISA allowance as much as possible to keep things tax free. However, the ISA allowance is only £20,000 per year per person. Whereas the pension Annual Allowance is potentially up to £60,000 a year depending on earnings.
Even if you are a high earner and your pension Annual Allowance has been reduced under the Tapered Annual Allowance rules you can still potentially utilise your partner’s allowance or even your children’s.
Finally, a major tax benefit of a Self Invested Personal Pension is its favourable Inheritance Tax treatment.
A share portfolio that is held outside of a pension, even if its in an ISA will be subject to Inheritance Tax on your death unless it is invested in Business Relief qualifying shares.
Even if you do trade in AIM shares and they qualify for Business Relief the value of your holding may still have a knock on effect of reducing your available Residence Nil Rate Band. The allowance that you can use to help reduce your Inheritance Tax bill on your property.
Stocks and other investments inside your pension are usually free of Inheritance Tax on your death and do not add to the overall value of your estate. Making a Self Invested Personal Pension a great way to pass on a quality share portfolio to your children.
If you would like to stress test your retirement plans or even to get a plan in place then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy and protected retirements over the years. This could be you too.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
