Is a SIPP right for me?

What are the benefits of a SIPP?

The key benefit of selecting a SIPP is the investment choice. Rather than pick from the funds offered by your pension provider, a SIPP allows you to build your own pension portfolio from a wide range of investments including funds, shares, gilts and, in some cases, even commercial property.

As you are in control of your investment choices, you call the shots on where and how you invest. You could go for a simple approach, selecting one or two funds that adjust their holdings as you get closer to retirement age. Or you could spice up your portfolio with individual shares, including those listed on AIM, international investments, stocks listed on international exchanges and even foreign currency. If it suits your investment appetite, you could even add in some commercial property or other non-standard investments, such as gold.

You can also change your investment strategy whenever you like. You might want to invest in line with your principles or extend your portfolio as you gain more confidence. The choice is entirely yours.

What other reasons make SIPPs a good idea?

Alongside the investment choice offered by a SIPP, they also give you all the benefits you would get from saving into other types of pension.

• Tax benefits

One of the main benefits of saving into a pension is tax relief on contributions. Pay £80 into your SIPP and it will be topped up with 20% tax relief, turning your contribution into £100 in your pension. Higher rate taxpayers can claim a further 20% tax relief through their self-assessment tax return and additional rate taxpayers can claim a further 25%.

Your pension investments also benefit from tax-free growth, with no income tax or capital gains tax due on any investment growth or dividends. And, when you reach age 55 (57 from 2028), you can take up to 25% of it tax-free (subject to a maximum of £268,275).

• Boost your retirement income

Setting up and contributing to a SIPP can increase your pension savings and give you more income in retirement. You will need to be mindful of the annual allowance, which applies to all of your pensions if you have more than one, but the more you pay in, the more money you should have to fund your future.

You can open a SIPP alongside a workplace pension or you could have it as your primary pension.

• A home for ‘forgotten’ pensions

Most of us accumulate a series of pensions as we move between employers and there are several advantages to consolidating them within a SIPP.

Bringing them all together makes it easier to keep track of your retirement savings. Everything is in the same place so you can see instantly what you have. It also means you can take advantage of the investment choices available on a SIPP across more of your pension savings. It can also be more cost-effective to consolidate your pensions. Some pensions, especially older ones, have higher charges or fixed policy fees. By bringing everything together in a SIPP, you could reduce the cost of managing your pension, ultimately meaning that more of your money stays in your pension pot.   

It’s easy to consolidate pensions but we recommend seeking financial advice first as some have valuable benefits you may not want to give up. 

• Savings for the future

It might not always feel like a benefit but your pension savings are locked away until you reach age 55 (57 from 2028). Even when you reach that age, you can still choose to leave your money untouched, and potentially benefiting from further growth and contributions, for your future.

• Flexibility when you retire

Your SIPP also gives you greater flexibility when you do reach retirement. From age 55 (57 from 2028) you can choose when, where and how you take your pension pot, flexing withdrawals from it to suit your lifestyle and needs. You could even choose to leave it untouched for further growth and potentially even future generations.

Is a SIPP right for everyone?

SIPPs are all about the investment choice so, if you’re not confident or interested in picking your own investments then the simpler fund options available through a personal pension may be more suitable. Having said that, many SIPP providers do now also offer portfolios that are constructed for different investment goals.

You also need to consider the charges. The breadth of investment options available through a SIPP means they tend to have different charging structures to personal pensions.

Some are more expensive than a stakeholder or personal pension but others can work out much more cost-effective so it is worth comparing costs before deciding what is right for you.

Example

ii's 'Pension Builder' SIPP has a flat fee of £12.99 a month. On an average pension pot of £80,000, this flat fee works out at just 0.19% a year.