Is a SIPP right for me?
A Self-Invested Personal Pension (SIPP) is one of many financial products that can help you save for your future. Understanding the features they offer, and the benefits they bring, will help determine whether a SIPP is a good idea for your retirement savings.
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.
- 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 and lifetime allowances, which apply 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 model 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. As an 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.
Getting financial advice?
A SIPP is a powerful retirement planning tool with many benefits but they are also complex. If you want to get the most from your SIPP, we recommend seeking professional financial advice. An independent financial adviser will be able to assess your circumstances and recommend the most appropriate action to achieve your goals.
If you are over 50, you can get free and impartial pensions guidance from Pension Wise. This is a government service designed to help people understand their pension options.
How can Pension Wise help?
If you have a defined contribution pension scheme and are 50 or over, then you can access free, impartial guidance on your pension options by booking a face to face or telephone appointment with Pension Wise, a service from MoneyHelper.
If you are under 50, you can still access free, impartial help and information about your pensions from Moneyhelper.
Learn more about our SIPP
Learn how to make the most out of your SIPP with our useful guides.
Please remember, SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial advisor before making any decisions. Pension and tax rules depend on your circumstances and may change in future.