Self-Directed Pensions – The Opportunity for You
When we think about a pension, most of us think in terms of regularly locking away money with a life assurance company and leaving the investment and administrative detail completely to professionals.
For most of us this is a very sensible approach, as our knowledge of investment markets tend to be cursory at best.
But for those with a greater savvy of financial markets, and the wish to exert greater control over how their money is invested, self-directed pensions (SDP) have become a favoured product choice with high net worth individuals and self-employed professionals.
People used to running their own businesses and taking charge of their own finances like the appeal of control that these pensions give them. Company directors and professionals at partner level or who have risen to the senior ranks also fit the bill.
Self-directed pensions are, in effect, a middle ground between traditional occupational and personal pensions and self-administered schemes.
Essentially the key difference is the level of investment control and options that are available to the investor. The widest options are available through self-administered schemes, but they are not for just anybody since they have to be administered by a recognised administration provider and the scheme must also file accounts annually.
Whereas money invested in traditional occupational and personal plans is pooled with that of lots of other savers and managed by professional fund managers, the self-directed route offers the individual control over what assets his or her money is invested in.
Savers who choose the self-directed pensions (SDP) approach – which is also a life insurance product – can do the investment management themselves or they have the option of opening a stockbroker account. Typically, they might start out by putting their money into a standard managed fund until there is a fund of sufficient scale to go into more specialised funds or individual stocks.
Self-directed pensions (SDP) typically appeal to individuals who want more control over their own pension.
They are sophisticated and, invariably, have been buying and selling shares outside of their pension fund investments. They now fancy that they can do better than mainstream fund managers either on their own or through their stockbroker. But self-directed pensions are not really suitable for risk-averse people who are best advised to leave it to the fund managers.
One of the advantages of self-directed pensions (SDP) over traditional pension plans that appeals to more active investors is the greater transparency this product offers. You have constant visibility of the assets your self-directed pensions (SDP) money is invested in, whereas clients of traditional schemes only get sight of this information once a year, while the information is invariably out of date.
But the big difference is the investment choice. self-directed pensions (SDP) customers can invest in a range of asset classes that includes cash (deposits), listed company shares; unit trusts and UCITS quoted on a recognised stock exchange, Government stocks and listed Exchange Traded Funds.
The good news is that when you invest these shares in your self-directed pensions (SDP) as a new contribution, you will receive tax relief on the investment at your marginal rate of income tax, assuming the contribution is within your allowable limit.
For personal pensions, there is no limit to the amount that you can contribute to a personal pension plan, but tax relief is only available on amounts invested up to a certain level.
At pension age, everyone has the option of taking some tax-free cash and of using the balance of the pension fund to buy an annuity that will guarantee an income for life.
However, an increasing number of individuals have the additional option of using the balance of the pension fund to buy an approved retirement fund (ARF).
This is a bond that allows you decide your own investment strategy, and from which you can draw an income if and as you wish. You should speak to your pension adviser regarding your options.
And, as with all pension schemes, the full tax savings on contributions also apply to self-directed pensions (SDP).
People who have existing share portfolios cannot simply transfer their shares into the self-directed pensions (SDP). However, they can replicate the shareholding by making a new contribution to their pension and instructing their SDP provider to use that contribution to buy the appropriate shares.