What is a SIPP and should contractors have a SIPP?

A SIPP, or Self-Invested Personal Pension, in its truest form offers individuals a wide choice of investment options, even though in times past it was the preferred choice of pension for small business owners, who wanted to efficiently own their business premises. 

Nowadays, there are a multitude of low-cost SIPPs available in the marketplace. So, SIPPs represent a proposition contractors should get their head around, so they can decide if a SIPP is suited to their retirement savings strategy or not, writes Angela James.

What is a SIPP?

A SIPP in simple terms is a ‘Do-It-Yourself’ pension.

Unlike an employer pension that comes with a pre-selected default investment or a personal pension that might have a smaller selection of funds to choose from within pre-determined levels of risk, a SIPP gives you complete choice and responsibility over how your money is invested within HMRC-approved investments.

You can opt for a full SIPP or a basic SIPP. A full SIPP offers additional assets such as commercial property but are much more expensive given the additional management costs to run assets like commercial property. And basic SIPPs like other personal pensions are offered by insurance companies and platform companies, with access to investment funds and the likes of share investments.

SIPPs tend to be suited to those contractors who have the time and expertise to run and manage their own pensions and risk, or those who have a financial adviser to provide this additional support.

What are the benefits of a SIPP?

A SIPP like any other pension offers the majority of the same benefits -- tax relief, a choice of investment funds, and the option to make regular or ‘lump sum’ contributions.

In my experience for contractors, what is important when choosing a pension is making sure the features and benefits will match your needs now and when you retire – the period when you want to get your hands on your pension monies.

For the majority of contractors, the decision as to whether they wish to take out a SIPP over any other pension comes down to its flexibility.

SIPP or not, here’s the three things to ask about your contractor pension

Indeed, the right personal pension regardless of the name of the wrapper -- SIPP, Stakeholder, Designer pension to name just a few, typically comes down to just three things nowadays:

  1. Flexibility for the contributions. Can you make lump sum payments, regular payments, or salary sacrifice? Can you increase or decrease the contributions depending on the contract or budget? What about ad hoc contributions, and can you change the way you fund the SIPP should you need to, and will that be easy and without consequence?
  2. Flexibility and choice over the retirement income options. So, can you flex your tax-free cash? Can you get a secure income in the future? Does the product offer a flexible drawdown or partial or full withdrawal?
  3. Does the pension offer the underlying investment options I need, or could need in the future?

Broadly, pensions for contractors fall into the below four categories:

1. Workplace pensions

For those contractors working an inside IR35 contract, you will choose an umbrella company or agency to facilitate your payroll, and in this circumstance a workplace auto-enrolment pension will be available for you to join.

The scheme will be a group personal or group stakeholder pension that will place you into a default fund choice, with usually a small choice of alternatives funds you could self-select from.

2. Stakeholder pensions

A straightforward personal pension that comes with capped charges, with usually a single fund choice or maybe up to a handful of fund options, within three to five specified levels of ‘risk’ that you can choose from.

3. Personal pensions

Not dissimilar to either of the above options, the main difference with personal pensions is that they will offer you a much larger range of investment funds -- from different fund managers to choose from that you can select yourself, with varying fees depending on your choice. Personal pensions do not have capped charges.

4. Self-Invested Personal Pension (SIPP)

In my experience, SIPP’s are proving to be a more popular topic of conversations these days, as it allows contractors to make their own investment decisions or take investment decisions informed by a financial adviser.

A SIPP offers a far wider choice of investment options, usually with thousands of funds to choose from across the fund universe, with varying levels of fund management styles.

Alternatively, in some cases, SIPPs let individuals invest directly into shares or even specialist assets, ideal if you wish to take a higher risk, more ‘hands on’ approach to both where to invest, when, and how to manage your monies yourself.

What to be aware of as a contractor considering pensions

Please be aware, regardless of the pension product model you choose, all investments can fall as well as rise and you could get back less than you invested.

Please also be aware that while tailored financial and pension advice is available from me, the above are only broad descriptions of just some of the pension’s choices available for contractors, albeit with a focus on SIPPs. As for what type of pension arrangement you should elect to take up or choose, will depend on your own specific needs and options available to you.

Personally, I liken contractor pensions choices to choosing which supermarket to do your weekly shop in! So whether you shop Waitrose, Tesco, Morrisons, Marks & Spencer, Aldi or Sainsbury’s, ultimately you will come home with a basket of goods to feed yourself for the week and maybe in some cases, come home with the same products just with different labels!

What’s in your (retirement savings) basket? Whatever the contents, reach out before getting giddy...

To continue the analogy further, one basket could be more expensive or less expensive than the other – and you may have had help deciding what goes into ‘the basket’ – or made decisions on your own. Oh, and remember, you made a choice, and that choice will likely have been based on budget, quality of goods, the service you get and any ‘deals’ at the time.

But where pensions shopping can seem like food shopping for all the wrong reasons – because you feel a bit overwhelmed at all the options available – reach out to me for tailored advice that won’t leave you feeling short-changed.

Have a free consultation to discuss your pension options here.



Profile picture for user Angela James

Written by Angela James

Angela is the managing director and senior adviser at Yolo Wealth our chosen advice partner. She has over 16 years’ experience in the industry, having spent the last 9 years specialising in advice to contractors and freelancers, and has worked in partnership with us during all that time.
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