Pensions are long term investments. You may get back less than you originally paid in because your capital is not guaranteed and charges may apply.
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However, this leaves you with a choice - what type of pension should you invest in?
There are many different ways to contribute to a pension, either via your employer or alternatively, by setting up a private plan. If you opt for the latter and relish the idea of having more input into where your money goes, a SIPP might be the right option for you.
We run through the basics of what is a SIPP, how it works and the factors you need to bear in mind.
Self Invested Personal Pensions, most commonly known as a SIPPS pension, and sometimes referred to as pensions savings, is a relatively new type of plan but provides individuals with the chance to take an active role in how their money is managed and invested.
In most types of pension, the individual pays their money and whilst they can specify their general approach towards risk, the actual strategy and fund management is looked after entirely by the provider.
With SIPP pensions, the individual can not only decide how much risk they want to accept, but also where to invest their money.
This is a key difference and if you aren't comfortable with this level of responsibility, SIPP investments may not be the right choice for you.
One of the other advantages of a SIPP is that there are a wide range of investment options for you to pick from, including commercial property. This isn't possible with many other types of pension investment.
Broadly speaking, according to SIPP rules, funds can be invested into any one of the following types of portfolio:
However, whilst there is certainly a broad choice, every provider has different rules about investment amounts.
On the SIPP providers list, some stipulate there must be a regular monthly contribution whilst others set a minimum level of investment. It is therefore vital to make sure you find a provider that has the right combination of options for your needs. Using a SIPP comparison table can help you identify the most suitable product and find UK pensions providers of SIPP more easily. Thus you can find the best SIPP and best SIPP provider for you.
When it comes to taking your annuity, a drawdown plan might be your best option as this offers a greater level of control than a traditional annuity purchase, making it more akin to the SIPP itself.
However, the investment itself may well determine how the drawdown can be taken and of course the focus will shift from increasing your 'pot' to maximising your income.
When taking a drawdown it's essential to not only maintain a decent level of growth in the fund, but also to secure it. High risk assets are therefore not appropriate once you start to receive an income from your fund.
SIPP drawdown rules regarding how much can be taken depend on individual circumstances, such as what other pension payments you are receiving, but providers will be able to let you know what options you have.
Finally, the other factor which should always be borne in mind is charges. Providers levy different rates and these can have a significant impact on the growth of your fund. Charges may be added to your SIPP at various times during its life, including when you request a switch in fund. Checking out how much you will pay before you choose your provider is therefore highly recommended to find a low cost SIPP. What initially looks like the best SIPP provider may not ultimately work out to be the cheapest SIPP when you take all the different charges into account.
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