When it comes to saving for retirement, there’s no one-size-fits-all solution. What’s right for one person may be inappropriate for another. So, whilst Workplace Pensions are among the most popular options, a Self-Invested Personal Pension (SIPP) may be better suited to you. It’s an option that’s worth considering as you explore ways to maximise retirement savings in a way that suits your plans.
First, what is a SIPP? As the name suggests, it’s a pension that allows you to choose and manage your own investments. You still benefit from many of the benefits of a SIPP, such as receiving tax relief and accessing savings in a similar way to a Workplace Pension once you reach retirement age. However, you’re given more freedom to tailor investments to suit you. The assets you can hold in a SIPP will depend on the provider, but will usually include a greater range than a standard pension.
Why choose a SIPP?
- Greater choice: One of the top reasons many investors are interested in a SIPP is the freedom to choose from a larger range of investments. Whilst standard pensions tend to focus on stocks and shares, government securities and cash which is appropriate for the majority of clients, a SIPP may give you an opportunity to invest in commercial property and traded endowment policies for those experienced investors. It may bring additional opportunities that allow you to diversify and, potentially, increase returns.
- You’re in control: Do you prefer to take control of your investments and financial decisions? A standard pension may be restrictive in this respect if you have clear, defined plans of how and where you’d like to invest. A SIPP gives you a chance to take full control of how your pension is invested.
- Match your risk profile: With a Workplace Pension you’re usually automatically signed up to a default fund with a middling level of risk. You can then usually pick between three or four fund options, with varying levels of risk. This may be suitable for most pension savers and meet your objectives, but, for others, there may not be a profile that matches exactly what they want. With the freedom to choose your own investments, risk can be tailored to you, although there are certain restrictions on what investment are allowed to be used within a SIPP.
Please also note that if you are entered into a workplace pension, your employer is unlikely to contribute into a separate pension contract and you could lose out of the employer contributions.
- Benefit from tax relief: Much like Workplace or Personal Pensions, you’ll receive tax relief on contributions as an incentive to save more for retirement. The amount of tax relief received is linked to your Income Tax band. For basic rate taxpayers, they’ll receive a 20% boost. Higher and additional taxpayers can claim 40% and 45% respectively. Whilst tax relief is a feature of standard pensions, it’s a benefit to consider if your alternative is investing outside of a pension wrapper.
- Tax efficient: Again, like standard pensions, SIPPs offer a tax-efficient way to save. You won’t have to pay Income Tax or Capital Gains Tax on the returns your investments make. It means your retirement savings can go further. However, when you come to making withdrawals from a SIPP, you may need to pay Income Tax on this. The amount payable will depend on a range of factors, including other sources of income and how you access the savings.
Of course, as with all financial decisions, there are drawbacks to weigh up too. You will be taking more responsibility for your pension and you should be comfortable with the decisions you need to make around this. Investment values can fall as well as rise and you need to take this into consideration, as well as your overall risk profile, when making investment decisions.
They generally have higher costs associated with them and, as you have more flexibility of the investments, they are generally suited to those individuals that have larger pension funds and who have the relevant experience in investments.
Creating a retirement saving plan that suits you
Each year you can place up to £40,000 into pensions and receive tax relief on contributions. You may have a lower Annual Allowance depending on your income, so it’s important to check this beforehand. The Lifetime Allowance may also have an impact, this is the amount you can save tax-efficiently into pensions in total. It’s currently £1.055 million. If your pension is above this, you may face additional tax when you come to making a withdrawal. It may seem like a higher figure, but when you consider how long you’ll be paying into a pension for, as well as investment returns, it’s easier to exceed than you think.
If you think a SIPP could support your retirement plans, we’re here to offer help and support. Whether you want to contribute exclusively to a SIPP or use one to support other pension savings, we’ll work with you.
Please note: A pension is a long-term investment normally not accessible until 55. Investments carry risk and the value of your investment can go down as well as up which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. Your pension income could also be affected by the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
