Cash clinic: Sipps have significant advantages but they are not for everyone

Q My financial adviser keeps telling me to put my money into a Sipp, but I don't understand exactly what it is and why it's different to my usual pension arrangements. I have a pension fund of £75,000 – is a Sipp even suitable for me?CS Ayr

A A Self-invested personal pension (Sipp) is an investment saving tool aimed at producing income for your retirement. It is a tax efficient option which is essentially structured in the same way as your personal pension arrangement, the main difference being that a Sipp offers the investor more flexibility in the choice of investments.

A standard personal pension can invest in mutual funds (for example, stocks and shares) that are either offered directly through the insurance company or product provider or externally managed funds that are on a selected panel.

A Sipp can invest in a range of mutual funds, but more specifically, can also invest in direct equities and commercial property. The latter point is particularly attractive for those wishing to diversify their portfolio to include property or indeed to purchase their own business premises. As such a Sipp can be used for retirement planning but also as a business planning tool.

A Sipp offers the same tax advantages as a personal pension with income generated untaxed. In addition, any growth in the pension is exempt from capital gains tax.

Another technicality that makes a Sipp appealing is that it can borrow up to 50 per cent of the underlying pension fund, ordinarily to fund a property purchase. This facility works like any other bank loan and will need to be maintained by regular repayments.

Legally, there is no minimum investment limit, although most Sipp providers will stipulate a minimum transfer or contribution amount. It is possible for example to set up a Sipp with monthly contributions as low as 50 or a transfer of 5,000 from another pension plan. Investors can put in up to 100 per cent of income up to the annual allowance of 235,000 each tax year.

A Sipp is slightly more complex than a standard pension but its flexibility is a real benefit. However, if you have a pension fund of 75,000, I would initially advise against a Sipp unless you are desperately keen on investing in commercial property or shares. The costs of setting up and managing a Sipp can be significantly higher than on a personal pension. If you do not make use of the additional benefits, you should not have to incur additional charges.

Please note that any pension investment decision you take should consider your wider financial picture and as such you should consider a comprehensive review with a qualified advisor.

• Christian Poziemski is a financial adviser within the private client and financial services division of HBJ Gateley Wareing.

If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected].

This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.