Self-invested personal pensions

Are you considering investing the money you're saving to retire? Here's a way to do it.

Updated

Saving enough money to guarantee yourself a comfortable retirement can be complicated, especially because you don’t know how much your savings will be worth in twenty or thirty years.

If you’re thinking of investing for your retirement but don’t know where to start, a SIPP can be a viable option.

What is a SIPP?

A SIPP, or self-invested personal pension, is a pension and investment product that you can use to save for retirement while growing your wealth through investments.

This type of product, along with other broadly similar products such as stocks and shares ISAs, is known as a wrapper because while it is not an investment in and of itself, it is a kind of imaginary membrane within which you can hold investments and which confers upon them certain benefits and conditions.

As mentioned above, a SIPP is also a pension product. This means that when you put money into your SIPP, you will benefit from the same tax advantages of any legitimate pension product – namely, you’ll effectively get back the tax you would have paid on that money.

What can you put in a SIPP?

You can benefit from tax relief on up to £40,000 of contributions in the 2018/19 tax year. If you’ve started taking taxable withdrawals from your pot, this falls to £4,000.

There is a lifetime allowance of £1,030,000 for the 2018/19 tax year as well, which is the maximum that you can draw from the pension without triggering an extra tax charge.

In terms of what you can hold in your SIPP, most mainstream investment products (open-ended funds, investment trusts, unit trusts and exchange traded funds) can be kept in a SIPP, as well as gilts (government bonds), corporate bonds and individual shares. It’s also possible to hold cash in a SIPP, although you won’t be paid interest on this at the same rate you would get with a savings product like a cash ISA. Some people increase their cash holding in their SIPP as a way to reduce risk as they approach retirement – although again, they won’t get as much in interest as they would have with a savings product. However, this might not be a big problem, as the cash still would have been subject to the tax top-up when you paid it in. In other words, by this time, the money may have already done the work it was meant to do.

Note that unlike in an ISA, it is possible to hold commercial property in your SIPP, but not residential property.

How much do SIPPs cost?

You can buy SIPPs with most online investment platforms including Hargreaves Lansdown, AJ Bell Youinvest and interactive investor. The platform will levy an annual charge, and you’ll also pay fees for whatever investments you choose (fund manager fees etc). The SIPP fee should be well below 1% of the value of your investments. Hargreaves charges 0.45% and AJ Bell charges 0.25%, each of which decreases with larger amounts of money. Alternatively, interactive investor charges a flat annual fee of £120, making it especially appealing for those with larger pots.

Why use a SIPP?

A SIPP is a retirement product and that sweet tax top-up is one of the biggest boosts you can get, especially when paired with compounding investment growth and dividend payments. With the tax top-up, the government will give you basic rate tax relief at 20%, meaning that for every £80 you put in, the government will top it up to £100. Higher rate taxpayers can claim back more tax relief as well, although this isn’t automatic.

As with other tax wrappers such as ISAs, the money you put into a SIPP can grow without you having to pay capital gains tax or income tax.

When you come to withdraw money from your SIPP, you can take a quarter of your pot tax-free. Any other withdrawals will be taxed at your marginal rate. Note that the tax-free amount doesn’t use up your personal allowance either (currently £11,850).

Why not?

Because a SIPP is an investment product, the biggest risks come from the performance of the investments themselves. The value of your investments can very well diminish as well as increase.

Compared to other retirement products, investors may prefer to prioritise their workplace pensions because employers will match contributions up to a certain point, boosting the amount going in even further. However, if you are already contributing as much as you can to max out your employer contributions, or if you don’t have access to an employer pension (for example if you are self-employed), a SIPP might be suitable for you.

Finally, because it’s a retirement product, you can’t access the money in your SIPP before age 55 without incurring a huge 25% tax penalty. If you will need your money sooner than this, consider foregoing a SIPP at least partially.

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