InvestmentPersonal Finance

The Definitive Islamic SIPP Guide (Self-Invested Pension Plan)

A Self-Invested Pension plan (“SIPP”) is a great way to save for your retirement. They’re perfect for people who want to be more hands-on with their own investments and want to collate their various pensions together in one place. An Islamic SIPP is simply a SIPP inveted in a halal way.

There are now Islamic SIPP providers as well as mainstream SIPP providers who can be used to construct an Islamic SIPP (don’t worry if you’re confused – we’ll explain).

This article gives a brief introduction to SIPPs and their Pros and Cons. Then we dive into a specific analysis of the Islamic SIPP options available and how they compare.

What is a SIPP?

A SIPP is a DIY pension. Many people will have workplace pensions that are offered through a provider like Aviva, Scottish Widows or the like. These workplace pension pots are managed by the fund managers are Aviva etc. and you have limited flexibility over what you can invest in.

With a SIPP on the other hand, you are the boss. You decide what you invest in and for how long. But with great investment power comes great investment responsibility, as Spiderman never said. You are now acting as your own fund manager so will have to live with your choices if they go wrong.

But if that doesn’t sound like you – fear not – there are now SIPP providers who offer ready-made portfolios that you can just opt into. So you get a lot of the benefits of a professionally-structured portfolio that way.

A SIPP is particularly relevant for self-employed individuals who may not otherwise have a pension.

Other key reasons people use SIPPs are:

  1. To get access to a wider range of investment products in their pension pot
  2. To bring together the various pensions you might have picked up across various jobs
  3. As they want their financial advisor to manage their SIPP for them
  4. People who like investing and want to control their own money

Types of SIPP?

Low-cost SIPPS

A low-cost SIPP will be an “execution-only” service usually. This means that the company providing this sort of SIPP will not give you advice or guidance on your investments.

However, within this category you get certain providers (like WahedInvest and SimplyEthical – more on them below) who provide ready-made portfolios that you can just put your money into.

This kind of SIPP will usually not let you invest in property directly, offshore funds, or unquoted shares in private companies.

Full SIPPs

With this kind of SIPP you will be able to invest in a range of assets – including property – and will have access to advisors who can guide you on your investment choices. But of course, you will have to pay a little bit more for this sort of SIPP.

This kind of SIPP is usually only suitable for experienced investors with relatively larger investment pots.

Like most other pensions, you can cash out your SIPP entirely at the age of 55. However, only the first 25% is tax-free. The rest is taxed at your highest tax rate (as in its money on top of your current income). So generally the wiser thing is to take out 25% and then slowly cash out the rest of the SIPP over a number of years to minimise the tax due. Or, alternatively, leave the money in the SIPP and just use the income.

You can also use Buy-to-let mortgages to buy commercial property held through a SIPP. You can check out the Islamic buy-to-let mortgage providers here on our comparison page.

What can SIPPs Invest In?

Not all SIPP providers offer a full list of what you can technically hold in a SIPP, but the full list is below:

  1. Stocks and shares
  2. Investment trusts (listed)
  3. Government bonds (haram)
  4. Gilts and bonds (haram)
  5. Exchange Traded Funds (ETFs) on European stock exchanges
  6. Unit trusts
  7. Bank deposit accounts
  8. Commercial property
  9. Real Estate Investment Trusts (REITs) that are listed on a stock exchange
  10. Offshore funds
  11. Open ended Investment companies (OEICs

Any of the above list of assets that is not labelled “haram” should also be sharia-screened for compliance. To learn more about halal stock screening see our course here. For more complex assets you can also post your question to our Muftis on our Fatwa Forum here.

Islamic SIPP Options

There are three main Islamic SIPP options:

  1. You do DIY any SIPP and make sure you choose halal assets to hold in the SIPP. This does require a working knowledge of what is halal and haram in the investment world.
  2. You go for WahedInvest’s SIPP product.
  3. You go for Simple Ethical’s SIPP product.

We can put you in touch with the relevant people at both Simply Ethical and WahedInvest. Just fill in this quick form and we’ll get you started.

WahedInvest Islamic SIPP Product

Wahed offer a simple SIPP (i.e. not one you can invest in unlisted shares, property etc.) through Options SIPP UK LLP, an FCA authorised firm.

The SIPP is then invested into a WahedInvest portfolio (which ranges from very conservative to very aggressive). Wahed charge their standard fees on that – which are 0.99% of the amount up to £250,000, and 0.49% above that. Underlying fund fees are additional and estimated to be approximately between 0.63% and 0.93% per annum.

However there are some additional fees to keep in mind:

  • Setting up SIPP – £200
  • Annual admin fee – £300
  • Transfer in from DC scheme – £200
  • Allocation of all or part of your SIPP to provide pension benefits – per event (includes the payment of tax free lump sum or pension lump sum) – £250
  • Annual fee for regular income drawdown payments
    • Monthly – £200
    • Quarterly £150
    • Bi-annually or annually £125 (small pot payments)

Simply Ethical Islamic SIPP Product

Simply Ethical provide their simple SIPP product (i.e. not one you can invest into property or unlisted companies) through Hartley Pensions Limited which is a UK registered company and is authorised by the FCA.

The minimum investment to open an account is £5,000 or £3,000 plus £100 per month. This can be in the form of new pension contributions or transferring existing pension(s).

Simply Ethical offers a platform (like an AJ Bell or Hargreaves Lansdowne) where you can invest in various investment products such as stocks and shares, funds etc. This is their “Trading SIPP Account“.

For the Trading SIPP Account, a minimum investment of £5,000, or £3,000 plus £50 per month, is required. There is no set-up cost but there an annual charge of £108.

The annual fees for this service are as follows:

  • 0.45% per annum for the first £250,000;
  • 0.25% per annum between £250,000 and £1m; and
  • 0.10% per annum above £1m.

This charge is subject to a minimum of £12.50 per quarter. Each trades costs £5.95 to execute.

But Simply Ethical can also offer prepackaged portfolios (similar to the Wahed ones) that you can opt for too. This is their “Simplified Advice SIPP“.

They charge a management fee as follows:

  • 0.75% per annum for the first £50,999;
  • 0.70% per annum between £51,000 and £100,999;
  • 0.65% per annum between £101,000 and £250,999;
  • 0.40% per annum between £251,000 and £1,000,000m; and
  • 0.25% per annum above £1,000,000.

Underlying fund fees are additional and estimated to be approximately between 0.48% and 0.73% per annum.

Additionally, there are some other fees:

  • If you fund your SIPP account from an employer deposit or contributions, there will be a £100 charge to cover administration cost for employer set-up and anti-money laundering checks that are required. Otherwise the initial set-up is free.
  • When you crystalise your pension, there is a a fee of £150.
  • Annual uncrystallised admin fee: £90 plus VAT per annum. Uncrystallised means you haven’t starting drawing money from your pension.
  • Taking benefits
    • establishment fee: £75 plus VAT
    • annual fee: £190 plus VAT per annum.

So how do these Islamic SIPP products compare?

Wahed charges £200 for setting up the SIPP whereas Simply Ethical’s set-up cost is free. So Simply Ethical is cheaper here.

The Wahed ongoing admin fee is £250 versus the £108 that Simply Ethical charge. So Simply Ethical is cheaper here.

Wahed’s annual fees below £250,000 is 0.99% and above that is 0.49% whilst Simply Ethical’s annual admin fee is 0.45% for the first £250,000 and 0.25% above that up to £1m, and 0.1% above £1m. So Simply Ethical is cheaper here.

The things going for Wahed are that (a) I expect their fees to fall as they start to scale; and (b) their user interface and experience is much smoother and simpler than Simply Ethical. But of of course Simply Ethical is currently cheaper.

Here’s a table which outlines the key differences side-by-side:

Wahed Invest

Simply Ethical

SIPP Account

Simplified Advice Online –

SIPP Account

Self Select Trading –

Trading SIPP Account

Key features

 

What is it – suitability?

 

Wahed ask you a bunch of questions to ascertain your investment objectives and risk profile and then suggest a suitable portfolio for you. They then manage these portfolios on an ongoing basis including if tweaks need to be made.

This is simply an online investment advice service which asks you a number of questions to understand your investment objectives and risk profile to then allocate you to a suitable portfolio of investments that are managed by SE on an ongoing basis.

Self Select Trading service is suitable for those who want to make their own investment decisions.

Are my investments managed for me?

Yes (these are pre-set portfolios)

Yes (these are pre-set portfolios)

No. This is an execution only service.

Minimum Investment

£40,000

£5,000 (but this can include a pension you are transferring)

£5,000 OR £3,000 plus £50 per month

Initial charges

 

Initial set up charge

£200

£0

£0 (If you fund your SIPP account from an employer deposit or contributions, there will be a £100)

Transfer in from defined contribution scheme

£200

£0

£0

Annual charges

 

Annual SIPP charge

£300

£0

£108

Annual administration or management charge

  • 0.99% of the amount up to £250,000;
  • 0.49% above that.

Underlying fund fees are additional and estimated to be approximately between 0.63% and 0.93% per annum.

It is tiered within bands as follows:

  • 0.75% per annum for the first £50,999;
  • 0.70% per annum between £51,000 and £100,999;
  • 0.65% per annum between £101,000 and £250,999;
  • 0.40% per annum between £251,000 and £1,000,000m; and
  • 0.25% per annum above £1,000,000.

Underlying fund fees are additional and estimated to be approximately between 0.48% and 0.73% per annum.

It is tiered within bands as follows:

  • 0.45% per annum for the first £250,000;
  • 0.25% per annum between £250,000 and £1m; and
  • 0.10% per annum above £1m.

This charge is subject to a minimum of £12.50 per quarter.

Dealing cost

N/A

£0

£5.95 per trade

Other SIPP charges (Taking benefits)

  • Allocation of all or part of your SIPP to provide pension benefits – per event (includes the payment of tax free lump sum or pension lump sum) – £250
  • Annual fee for regular income drawdown payments
    • Monthly – £200
    • Quarterly £150
    • Bi-annually or annually £125 (small pot payments)

£150 for Benefit crystallisation Event i.e. a charge applied when you take your benefits

Taking benefits:

  • Establishment fee: £75 plus VAT
  • Annual fee: £228 per annum.

Investment choice

 

Investments

The online service advises on and manages 6 portfolios:

  • Very conservative
  • Moderately Conservative
  • Moderate
  • Moderately Aggressive
  • Aggressive
  • Very Aggressive

The online service advises on and manages 7 portfolios:

  • Defensive
  • Conservative
  • Cautious
  • Balanced
  • Balanced Growth
  • Growth
  • Progressive Growth

Investment options include:

  • Funds
  • ETFs
  • UK listed shares (over 100 companies)

Service

 

Account opening

Paper-based but switching online

Fully Online

Part application is online and part paper based

Annual calculation of Zakat percentage on your portfolio

Zakat guidance is provided.

Yes

Zakat guidance is provided.

Do I have 24/7 online access to my account?

Yes

Yes

Yes

Can I speak to a person?

Yes

Yes

Yes

 

Transferring your pension?

 

Can I consolidate or transfer my previous workplace pensions (defined contribution pension only) and/or personal pensions including SIPP?

Yes

Yes

Yes

Transfer in charge

£200

£0 (If you fund your SIPP account from an employer deposit or contributions, there will be a £100)

£0 (If you fund your SIPP account from an employer deposit or contributions, there will be a £100)

To transfer a pension, Are my wet signatures required on transfer form?

Yes (but moving to an online system)

No. The transfer process is fully online.

Yes.

Transferring Your Pension Into a SIPP

Defined Contribution/Money purchase pension

You can relatively easily transfer your money from a defined contribution pension scheme (this is where the likes of Aviva etc are managing your pension pot and most private employers will have such a pension scheme).

However, really really crucially – if your employer contributed into your defined contribution pension pot, you really shouldn’t go for a SIPP as you would lose that essentially “free” money that the employer is forced to contribute into your pension under UK law.

However if your employer is happy to contribute into your SIPP instead, then that is great and you can go for a SIPP without losing that “free” money.

Defined benefit/final salary pension

Defined benefit pensions are usually offered by the government in the public sector (such as the NHS) and are very generous and come with additional perks for spouses. As such you should probably stay in these schemes (and they are also sharia-compliant) as long as you can.

Tax Relief on SIPPs

You get tax relief up to 100% of your annual salary (up to a maximum of £40,000) when you pay into a SIPP. What that means is that any money you put into a SIPP doesn’t get taxed at the time it goes in. However it will get taxed when it comes out as discussed above.

If you earn over £240,000 however, for every £2 you earn, the allowance reduces by £1 until eventually you’re left with £4000 tax free allowance.

A similar tax-free wrapper is the ISA – where you can put in £20,000 tax-free. This money doesn’t get taxed on the way out though.

Practically, the way a tax relief works is, some of the money that you would have paid in tax on your earning goes instead into your pension pot rather than to the government.

Basic-rate taxpayers get a 20% pension tax relief. Higher-rate payers get 40% and additional tax-rate payers get 45%.

So if you contributed in £10,000 into your pension pot as a basic-rate taxpayer, the government will add £2,500 to that. This is the same for higher-rate and additional-rate taxpayers too, but they can also claim back an additional £2500 (20%) in the case of a high-rate payer and £3,125 (25%) in the case of an additional-rate taxpayer.

So the total “cost” of that £12,500 that ends up in your pension pot is actually cheaper for the higher-rate taxpayer and additional-rate taxpayer. A £12,500 costs them £7,500 and £6,875 respectively.

In other words, for higher earners, the government is incentivising them to put more into their pensions.

Conclusions

An Islamic SIPP is a great option for people who are confident investors, or who want to pool their various investments into one pot, or who might want to invest in commercial property, or self-employed consultants/freelancers who otherwise don’t have a pension.

We can put you in touch with the relevant people at both Simply Ethical and WahedInvest. Just fill in this quick form and we’ll get you started.

2 Comments
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2 Comments. Leave new

  • Syrah Hassan
    May 30, 2020 5:30 pm

    Salaam Alaikum,
    I think there is an error in the Simply Ethical charges ie. 45% for the £250,000. 25% for between £25000 and 1 million.

    Looks like just a decimal point missing in those listed charges but thought it best to.point it out.
    Wasalam

    Reply
  • Syrah Hassan
    May 30, 2020 5:39 pm

    Salaam Alaikum,

    Also kindly check that the charges mentioned are for a SIPP account and not an Investment trading account.

    Reply

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