Ever wondered what a Self-Invested Personal Pension (SIPP) actually is? As it is a form of pension, for some people who feel far away from being pensioners, it can seem like it is not worth finding out.
But the younger someone starts squirreling money away into a pension, the longer the timeframe they have to put it to work trying to build wealth for retirement. That is true of a SIPP too.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Taking a long-term view towards investing
While most of us know or can see why having time on our side when it comes to investing could help us, people still procrastinate.
When it comes to pensions, payout may be decades away, so what is another year or two of waiting before starting one?
The answer can be considerable, as over the long term, compounding can be more powerful.
Someone who puts money into a SIPP cannot withdraw a penny until they hit 55 (and that age is set to rise). That may seem like a disadvantage but I see it as an advantage in the sense that it reinforces the long-term approach to investing.
Tax relief means you can invest more than you put in
A big advantage of a SIPP as I see it is the tax relief it offers. The words ‘tax relief‘ may already lead some people to switch off. But that could be a costly mistake, as this is effectively free money.
By topping up contributions, the Exchequer enables an investor to have more money in their SIPP to invest than they contribute. The exact amount depends on income tax rate: higher and additional rate payers can benefit even more handsomely than basic rate payers.
But across the board, this is a substantial and tangible benefit of the SIPP structure, in my opinion.
Money can grow tax free
What about the money that is in the SIPP? Inside the wrapper, it can grow free of Income Tax or Capital Gains Tax.
Now, that is also true of an ISA — and withdrawing money from a SIPP can be subject to more onerous tax treatment than when taking money out of an ISA.
Still, over the long term, being able to accumulate dividend income and capital gains free of tax inside either a SIPP or ISA wrapper could be a significant benefit.
One share in my SIPP
One of the holdings in my own SIPP is B&M European Value Retail (LSE: BME). Its share price jumped in the past week following the release of preliminary results that suggested a turnaround strategy may be starting to bear some fruit.
Personally I did not think the results were strong, but the lack of any nasty surprises seemed to reassure the City that perhaps the worst is behind the discount retailer as it tries to put weak sales in parts of its UK business behind it.
I think investors need more time to know with confidence whether that risk has passed. Still, with the B&M share price 61% lower than five years ago, I think it is priced in.
The company is solidly profitable, has a proven business model and is a strong brand.
I believe its focus on price competitiveness could help lift sales in an environment of weak consumer confidence so it may be one to consider.
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Criristopher Ruane owns shares in B&M European Value Retail.
