How SIPPs Work

With newspaper columns full of stories about underperforming fund managers and the looming pensions crisis, savvy investors have started taking matters into their own hands with SIPPs.

A SIPP is a self-invested personal pension. In simple terms they are pensions over which the investor has much greater control, both in terms of investment flexibility and where those investments are placed.

Previously SIPPs were aimed at wealthier investors, but this has now changed and the choice of products on the market is greater than ever. In addition to this, the Government will be making changes to the laws governing private pensions in April 2006, which should greatly benefit SIPPs savers.

Sipps-Pensions.co.uk General Disclaimer

So what is it that makes SIPPs so attractive?

To start with, SIPPs are treated just as any other personal or stakeholder pension in the eyes of the taxman. With the annual savings gap (the money that the nation should be saving in order to retire comfortably) standing at a staggering £27 billion, the Government is keen to encourage people to save.

Therefore, as a taxpayer, you're entitled to a 28% top-up on anything you invest. For example, for every £1,000 you invest into SIPPs, the Government will pay another £282.

As a higher-rate taxpayer you would get an even larger payout as you could claim back an extra £231 through your tax return.

These generous tax breaks make pensions one of the most attractive investments you can make. A pension could make you £10,200 more than most other investments during a 20-year period (assuming an initial investment of £10,000 and 7% growth per annum).

With an ordinary personal or stakeholder pension you are limited as to where you can invest. However, with a SIPP you are free to choose from many more potential investments, including commercial property and even individual stocks and shares, allowing you to spread the risk if certain markets are performing badly.

With SIPPS you also have the flexibility of switching between investments if they are underperforming.