A Self-Invested Personal Pension (SIPP) is a type of private pension that gives you greater flexibility over how you invest your retirement savings.
Unlike traditional pensions which limit your investment options, a SIPP allows you to choose from a diverse range of assets.
While most people invest their pension into typical securities like stocks and bonds, a SIPP enables you to hold much more than that.
Many people don't realise the extensive investment possibilities that SIPPs provide.
“The misconception is that pensions can only be invested in conventional assets like equities, funds and bonds.
However, the reality is that innovative investors can use SIPPs to gain exposure to a wide array of alternative investments. You just need to be very careful with taking investment risks in your pension, and seak financial advice if you’re at all unsure.” - Sam Hodgson, Pensions Expert at SIPP Advice
This opens up new opportunities to diversify and maximise your pension savings.
From direct holdings in physical property to investments in precious metals, a SIPP unlocks investment potential that you may not have considered for your retirement portfolio.
The ability to spread your capital across assets outside of traditional securities can help manage risk and generate additional income streams. As long as the investments are permitted according to SIPP regulations, the possibilities are far broader than you may assume.
This article explores 3 alternative investment asset classes that you may not have realised could be held tax-efficiently within a SIPP.
1. Invest in Gold Bullion
One unconventional asset you can hold within a SIPP is physical gold bullion. Gold bars and coins can be purchased and stored directly in your SIPP account.
Adding direct exposure to gold can help diversify and protect your pension investments. As a tangible asset, gold has intrinsic value and acts as a hedge against inflation and market volatility.
It tends to hold value when other assets decline, making it a key diversifier for retirement portfolios.
The process of investing in gold through your SIPP is straightforward.
Most SIPP providers offer the ability to buy bullion from accredited dealers. While not all SIPP providers facilitate this, you can open a new SIPP to hold just your gold bullion if you wish and keep your other SIPP open, because you can have more than one SIPP at oncee.
You can purchase coins or small bars, which the SIPP provider will store securely on your behalf.
Also, when buying or selling, transactions are made through your SIPP account so there are no capital gains tax implications.
There are some limitations on holding physical gold in a SIPP - there are restrictions on the types of gold allowed, including minimum fineness levels for coins and bars. Storage and insurance fees may also apply from your gold provider.
But within reasonable limits, allocating a portion of retirement savings to gold bullion can act as a hedge and diversifier. The tangible nature of physical gold held directly in your pension offers alternatives that stock and bond investments do not. For those looking to spread risk across assets, gold bullion offers a way to diversify using the flexibility of your SIPP.
2. Purchase Commercial Property
Another option to diversify your SIPP is purchasing commercial property like offices, shops, and hotels. The rental income generated can provide regular cashflow into your pension account - and it will be tax free until you actually withdraw those funds from the wrapper.
Certain types of commercial property are eligible to be held within a SIPP. This includes office spaces, retail units, industrial warehouses, and hotels.
To qualify, the properties must be based in the UK or EU and meet other requirements.
Residential property is not permitted.
The process involves finding a suitable commercial property and instructing your SIPP provider to acquire it out of your pension funds. Your provider will perform due diligence to ensure it is eligible. Any rental income goes directly into your SIPP and helps grow your pension pot.
There are risks to be aware of when holding commercial property in a SIPP. Illiquidity is a major consideration, as property can take time to sell. Vacancies may also lead to periods without rental income. Generally speaking, professional property management is essential to minimise void periods.
Despite the risks, commercial property can provide diversification for your retirement funds.
Rental income can hedge against stock market volatility, and while not without challenges, commercial premises as part of a balanced SIPP portfolio can enhance diversification and generate cashflow leading up to retirement.
Get advice to ensure you fully understand the requirements and risks involved. But for investment-savvy SIPP holders, commercial property unlocks possibilities not available in traditional pension schemes.
3. Buy Residential Land
That’s right - some types of residential land can also be held within a SIPP to generate rental income for your pension pot. However, it is important to clarify that SIPP rules only allow residential land to be used for commercial purposes.
Examples of permitted land uses include leased farmland, woodland, caravan parks, or campsites. The key is that the land produces income, so personal residential land like gardens are not allowed. The land must also be located within the UK or EU and meet size requirements which vary by SIPP provider.
To purchase land through your SIPP, you instruct your provider to acquire it using funds from your pension. You can then lease the land to tenants to generate rental income. This regular cashflow is paid into your SIPP.
Owning land can provide diversification along with regular pension contributions from rent. However, you need to consider ongoing costs like maintenance and insurance. Land that requires development may be ineligible, so proper due diligence is key.
While residential land has its complexities, it unlocks possibilities for using a SIPP to own tangible, income-generating assets beyond typical securities. As with any investment, there are risks to manage and regulations to follow. But for the right investor, land can provide diversity and income that enhances the growth of your pension leading up to retirement.
The key is focusing on commercial leasing purposes only. With careful selection and management, residential land that generates income can be a unique asset holding within a Self-Invested Personal Pension.
The Tax Benefits of Investing in a SIPP
One of the major advantages of using a SIPP is the tax relief you receive on contributions. This can significantly boost your pension savings over time.
In the UK, SIPP contributions receive tax relief up to an annual allowance, which is currently £60,000 for most people. Or if you earn over £60,000 per year, your limit is your annual income figure.
This means for every £100 you contribute from your after-tax income, HMRC will top it up with an extra £25.
Higher rate tax payers can claim even more tax relief through their self-assessment - 40% - and additional rate tax payers can claim a whopping 45%. The tax savings you receive are effectively a government bonus which lets you grow your pension faster.
For example, if you contribute £8,000 to your SIPP in a tax year, HMRC will top up your contribution by £2,000. So you end up with £10,000 in your pension from an £8,000 outlay. Over time, this tax relief can add tens of thousands to your SIPP.
The annual allowance means most people can get £10,000 in tax relief per year. While you can contribute more, additional contributions don’t receive tax relief. For high earners, the allowance may be lower based on income thresholds.
When you combine the tax relief with the right investments, your SIPP can grow significantly over the long run. The tax advantages provide an incentive to maximise your annual contributions within the limits.
Using the investment flexibility of a SIPP while benefiting from the generous tax relief can accelerate your retirement savings. However, it is generally recommended to consult a financial advisor specialising in SIPPs to understand how to fully utilise the allowances each year.