The investor's choice when it comes to saving for a pension.
In this article you'll find:
- An explanation of what SIPPs are
- When you should consider a SIPP over other pension options
Your pension. It could be the most important financial investment you will ever make. But how can you ensure it lasts as long as you need once you're retired? And what are the best ways to save for your pension fund?
Here we take a look at one pension option that provides full control over your investment: self-invested personal pensions, or SIPPs.
Your pension is meant to sustain you throughout your old age, from the end of your working career onwards. Unfortunately (or perhaps fortunately), no one knows exactly how long their retirement will last, making it crucial that you start saving for a pension as soon as possible.
SIPPs vs personal pensions
Self-invested personal pensions (SIPPs) are a great way to save for your retirement income. To minimise risk, most pension products offer little or no freedom over how your pension contributions are invested, but SIPPs - introduced in the UK in 1989 - offer control over your investments, allowing you to make a range of different investment choices and take control over your pension fund. SIPPs offer much more flexibility for an investor which, of course, could be a blessing or a curse. Normally they are suitable for sophisticated investors making their own decisions or to use in partnership with a financial adviser who can help you make the right choices.
SIPPs are useful if you have built up multiple pensions from different employers, allowing you to consolidate your pensions yet still keep the money invested - but you can also draw money out to use as retirement income.
Whatever you do next, we strongly recommend speaking to a financial adviser before selecting your pension strategy or signing up to a pension product.
The basics: How you save vs. how you cash it in
A pension, in its simplest form, is a tax-efficient savings arrangement that becomes available to you once you turn 55. There are three main ways of saving for a pension (see below), but how you then use this money once you retire is up to you.
You can take out the full amount (this may not be the best option, so it's important to speak to a financial adviser) or use your pension in a number of different ways. Options available range from the control offered by a 'drawdown' (where you are able to withdraw varying amounts) or the consistency of a guaranteed-income annuity.
The three types of pensions savings options:
- State pensions Covered by national insurance contributions, the state pension is provided to everyone once they reach retirement age, but the returns are low.
- Occupational pensions Provided by your employer, occupational pensions are now opt-out instead of opt-in, so you should be automatically added to your company's scheme unless you decline.
- Personal pensions You can also purchase pension schemes. A SIPP is an example of a personal pension scheme.
Higher growth, higher risk
A self-invested personal pension is a type of personal pension scheme that provides the freedom and control to invest in a wide range of assets. The aim is to invest wisely and produce a gain to increase your pension pot and leave you with the largest possible retirement income.
Compared to an annuity, SIPPs are inherently more risky, as you will be investing your pension money in stocks and shares, collective investments, trusts, and insurance bonds. But this also means greater growth potential than standard pension funds (such as the state pension, or most employer-provided pension schemes).
Like all pension products, SIPPs are subject to tax breaks. Depending on your personal circumstances, you could receive up to 45% tax-free on contributions (money paid in) to your SIPP, and no capital gains tax.
Start from zero or transfer your pension to a SIPP
SIPPs are a financial product that anyone can purchase and begin paying into at any time, but watch out for the fee structures, which can begin to add up very quickly. It also helps to have extensive investment experience in order to get the best from your SIPP - unless you've paid for expert financial advice. Additionally, you can transfer your existing pension funds into a SIPP, but some existing funds are more suitable than others; you may be better off sticking with your original scheme.
Our experts can help you plan for retirement and guide you through the pension process, call us today on 0333 241 9900.