The one sentence version: Sipping from the pension cup can taste good

The longer version: A Self Invested Personal Pension (Sipp) is an investment savings vehicle aimed specifically at producing income – or a tax-free lump sum with a reduced income – in retirement. It is tax efficient and allows the holder a good degree of say in what investments are held.

The range of investments that you can hold in a Sipp are many and varied, ranging from stocks and shares to futures and options, and from collective investments such as unit trusts to bank deposits and commercial property.

Despite being previously widely trailed, there are distinct tax disadvantages to the holding of exotic assets such as vintage cars, wine, stamps and art, so these are effectively off the list for investors.

The tax treatment of a Sipp is identical to that of a conventional personal pension you take out with an insurance company. Individual contributions receive automatic tax relief at the holder’s marginal rate while any contributions by employers are allowable against corporation tax or income tax.

Income from assets in the scheme will remain untaxed and growth in the pension is free from capital gains tax.

Income taken in retirement from either an annuity or via income withdrawal is taxed as earned income at the member’s highest marginal rate.

Understandably for a more flexible style contract, the structure of a Sipp is slightly more complex than a personal pension and necessitates the involvement of a scheme administrator. The administrator exercises control over what happens within the Sipp and ensures that the requirements for tax approval continue to be met.  

The question of whether an investor needs a Sipp over a personal pension plan will depend largely on the specific investment desires of the individual investor. 

The fullest investment choice is available via the Sipp but this must be balanced against the slightly higher administrative burden and the underlying costs involved with the running of a Sipp.

However, as these products have now moved firmly mainstream it is often possible to find that the costs do not vary hugely, particularly once the investment funds have grown to reasonable levels.