08/02/21Self-invested personal pensions: Are they right for your savings and achieving life goals?
More people are considering and starting to pay into a self-invested personal pension (SIPP). Increased engagement with retirement planning is good news, but a SIPP is not the right option for everyone. If you are thinking about opening a SIPP, it is important you understand what they are and the drawbacks as well as the advantages.
While there is a growing interest about SIPPs across all consumers, it is women and younger generations who are driving the change, according to research from Interactive Investor.
Among women and men aged 25 to 34, there has been a rise of 200% and 185% respectively in the number of people with a SIPP. Across all generations, the rise in women choosing a SIPP surpasses men. For instance, there was an 89% increase in women aged between 55 and 64 opening a SIPP, compared to 66% for men.
Women have traditionally had lower amounts saved in their pensions and it can be hard to encourage younger generations to think about retirement plans that are several decades away. So, the rise in people actively opening a SIPP and, hopefully, making regular contributions, is positive. However, it does come with risks and responsibilities that are important to understand.
What is a SIPP?
A SIPP is a type of pension. As the name suggests, you choose how your contributions are invested. This gives you more freedom, but also means you need to make investment decisions that will affect how much income you have in retirement.
Like other defined contribution pensions, a SIPP becomes accessible at the age of 55, rising to 57 in 2028. At this point, you can choose how you access it, from taking a flexible income through drawdown to purchasing an annuity which would provide a guaranteed income for life. You can also take a 25% tax-free lump sum from your pension.
As with other pensions, you will also benefit from tax relief when saving into a SIPP. This means you would receive an instant boost to your contributions.
The pension annual allowance also applies to SIPPs. This is the maximum you and others on your behalf, can contribute in total to your pension each tax year, tax efficiently. Your own personal contributions receive tax relief up to 100% of your annual earnings or £3,600 if more, but if your total contributions from all sources exceed the annual allowance you will suffer a tax charge on the excess. The standard annual allowance is £40,000. However, some circumstances would mean your annual allowance is lower or possibly higher. Please contact us if you are not sure how much you can contribute to your pension.
Is a SIPP right for you?
There is no straightforward answer to this question. It will depend on your circumstances and how comfortable you are managing investments.
The key advantage of a SIPP is that it gives you more control and access to a wider choice of investments. This means you can tailor your portfolio to suit your risk profile and goals. You can also hold commercial property in a SIPP, which can be attractive in some circumstances.
However, while the above is an advantage for some, it can also be a drawback. You will need to take responsibility for how your pension contributions are invested and keep in mind that investment values can fall. If you do choose to open a SIPP, it is essential that you have a clear, long-term investment plan in mind.
The costs associated with a SIPP may also be higher than using other types of pensions, so it is important to understand the charges and how they compare before selecting a platform.
If you are currently employed and have a workplace pension, you should also keep in mind that you could be missing out on ‘free money’ if you choose to pay into a SIPP over your employer’s scheme. If you are paying into your workplace pension, your employer must contribute in most cases. However, if you choose to add to another pension, this is not the case.
Essentially, a SIPP can provide opportunities for some investors and can be particularly attractive for business owners. However, it is not a simple decision. You should carefully weigh up the pros and cons of your options for saving for retirement before proceeding. In some cases, another type of pension will be more suitable.
One key question to consider is; am I confident in making investment decisions?
If the answer is ‘no’, an alternative way to save for your retirement may be more suitable for you. If you answered ‘yes’, that does not automatically mean a SIPP is the right place for you to invest. It is still important to explore other options and fully understand the decisions you will need to make.
Please get in touch if you would like to discuss a SIPP or other pension arrangements you could make to secure your retirement lifestyle.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulations which are subject to change in the future.