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SIPP: Small Business Owners and Self Invested Personal Pensions
Making sure you’ve got retirement covered.
Retirement savings are crucial for small business owners. There are many different ways to put cash aside for later life, but few are as reliable as a pension scheme.
Without the benefit of an occupational pension scheme, partially funded by an employer, many small business owners feel that they are likely to have a far less stable retirement than those who are employed all their lives.
However, you can be equally well looked after in your golden years as long as you utilize the options available. Small business owners don’t need to worry about their financial security if they plan carefully. If you are concerned about how much pension you should save for retirement then take a look at Self Invested Personal Pensions.
What is a Self Invested Personal Pension?
It is a type of pension plan approved by the UK government. Self Invested Personal Pensions (SIPPs) give you more control over what happens to the money that you put aside for retirement. Within the wrapper of SIPPs, you can choose the investments your cash is assigned to from a vast pool, far more significant than you’d have access to via a standard pension plan.
For example, with SIPPs, you can invest your cash in equities and property, as well as the more conventional range of investment choices. When it comes to management and administration of SIPPs the rules relating to contributions, withdrawal etc are fairly similar to a standard pension plan.
The significant differentiating feature is the influence that the pension holder can have over what happens to the money set aside.
Who can use a SIPP?
SIPPs are available to anyone and come in a variety of structures that make them ideal for small business owners who are looking to create bespoke retirement savings. It’s worth noting that SIPPs are best suited to those who are willing to take the time to research investment choices and get involved in selecting the right place to put your cash. If the investment doesn’t perform well then there is no one else to blame.
How do you set up a SIPP?
- Choose the kind of SIPP you want – ‘execution only’ i.e., where you’re completely in control of all the decisions or a ‘full SIPP,’ where you get advice on the SIPP. The full SIPP costs a little more but you’ll also have access to a wider pool of investments.
- Find the right SIPP provider – there are many providers to choose from and the “right” one will depend on factors such as how much you’re planning to invest. Look closely at what providers charge and use that as a starting point. If you have less than £50,000 to invest then opt for a provider offering percentage based fees – if you have more than £50,000 to work with then fixed fee deals can be a better option.
- You can set up and manage a SIPP entirely online – most SIPPs are designed to be cost-effective and so you’ll be able to set up the SIPP and make all your investments online. If you’re looking for phone or post support from the SIPP provider then check whether this adds any costs.
- Make contributions to your SIPP – you can start investing with a lump sum amount or you can make regular new contributions to the SIPP.
- Or transfer across cash from an existing pension – you might have an old occupational pension created before you started your own business and want to move this across to the SIPP, for example. You can use a SIPP to consolidate other pensions in one place to make your retirement savings more efficient. Just make sure you check whether there are any transfer fees involved in removing that money from another pension.
What kind of investments can be made with a SIPP?
You can invest in almost anything when you set up a SIPP. This could be shares or commercial property, as well as gilts (government bonds) and corporate bonds. If you don’t have that much experience with investing then it’s a good idea to start with the investments that you best understand and gradually get to know what it feels like to invest.
The more interest you take in the investments, the more return you’re likely to see on the cash you’ve put in. However, bear in mind that values can fall, as well as rise, so you could easily end up with less than you started with if you make the wrong choices.
What is the tax position with a SIPP?
Like other types of pension there is no capital gains tax or UK income tax to pay and up to 45% tax relief is available on contributions. You can contribute up to 100% of your earnings to a SIPP, subject to annual limits (£40,000 in 2016/17).
As well as the annual allowance there is also the lifetime allowance (“growth time allowance”), which means you can put up to £1 million tax-free into your pension over your lifetime.
What are the costs involved?
- Annual management fee – varies from provider to provider; some don’t charge anything
- Set up fee – this could be zero or £500+;
- Dealing fees – every time you make an investment there will be a small fee to pay, depending on the size of the investment;
- Transfer fees – if you decide to put cash from another pension into a SIPP it could cost you;
- Income drawdown fee – fees to start drawing down your SIPP can be up to £150 a year.
How can you access a SIPP when you retire?
Drawdowns can start from the age of 55 (increasing to 57 in 2028) so SIPPs offer earlier retirement options than some other pensions. After any fees, 25% of any drawdown will be free from tax and the rest will be taxed normally as income.
Why are SIPPs a good idea for small business owners?
- Flexible and accessible – set up and manage the SIPP online with the maximum or minimum of support, depending on your preference;
- Choose your own investments – have more control over where your money is invested and what happens to it;
- Set up at any time – start your SIPP fresh with new contributions or use it to consolidate older schemes;
- Earlier drawdown age – access your pensions savings from the age of 55.