Why it could pay to take a SIPP

Engaging with your financial needs in retirement is key to ensuring you have enough money for a secure future.

A self-invested personal pension (SIPP) is one way of boosting your pension savings.

Thanks to the valuable tax perks and flexible features it can be a powerful tool for retirement saving and wider financial planning.

A SIPP is not an investment itself. It’s a tax-efficient pension pot inside which investors can place a portfolio of investments.

Here are some of the compelling features of a SIPP that you need to know about:

1. Tax efficiency:

A SIPP offers tax relief on contributions. All taxpayers get 20% paid by HMRC to the pension and if you pay income tax at a higher or additional rate you can claim relief from HMRC on your self-assessment tax return.

Up to £40,000 a year can be put into a pension. If you go over the limit you won’t get tax relief on further pension contributions.

The money invested in your SIPP grows free of capital gains tax and income tax.

Under current rules, at the age of 55 you can take up to 25% out of your total fund, without paying a single penny in tax. After the tax-free lump sum is taken, the rest of your withdrawals will be taxed as income.

“An adviser can help set up a SIPP with a portfolio of investments that are tailored to your needs and goals in retirement.“

2. Control of your investment strategy

SIPPs offer access to thousands of investment funds and you have complete freedom to choose how and where your SIPP money is invested within the options available.

Your investment choices can be changed at any time, so that your SIPP always reflects your own risk horizon and goals. This is useful because attitude to risk changes throughout life. For example, in the run up to retirement you are likely to want to shift a large portion of your pot into less risky investments.

3. Designed for all ages (up to 75)

While money saved into a SIPP cannot currently be accessed until you reach age 55 (57 from 2028), you can continue paying into an account until age 75. If you stop working you can continue to make contributions into your SIPP – and benefit from tax relief. Even a baby can have a pension. Currently up to £2,880 can be put into a pension (a Junior SIPP) for under 18s each year to which HMRC adds £720, making a total of £3,600.

4. SIPPS accept transfers

You can either start your SIPP from scratch with money that hasn’t been held in a pension before, or you can use it as a new home for other pension schemes you hold elsewhere. SIPPS allow you to transfer in from other schemes – private and workplace – so you can have all your retirement savings in one place. It’s important to check you’re not giving up any valuable guarantees attached to pension schemes by moving the money. It’s also crucial to consider any difference in annual charges before taking any action.

5. Tax savings for self-employed

The self-employed are entitled to all the same tax reliefs on pension contributions as employed people. Without a workplace pension scheme in place, a SIPP can help to build a pension pot for the future and save on annual tax bills.

6. Flexibility at retirement

When you reach the age of 55 you can start drawing money from your SIPP, regardless of whether you’re still working.

SIPPs allow you to convert your pension into an income drawdown account, which means you can take as little or as much as you wish as a one-off sum or regular income. Meanwhile, the rest remains invested.

7. Tax-efficient passing on of wealth

A pension is a very tax-efficient way to pass on your wealth. Your SIPP can be left to any beneficiary (or number of beneficiaries) that you choose, free of inheritance tax. If you die before age 75 there is no income tax to pay either. If you are 75 or over when you die, a beneficiary of your pension pot will have to pay income tax on any withdrawals at their marginal rate.

An adviser can help set up a SIPP with a portfolio of investments that are tailored to your needs and goals in retirement.

The golden rule as with all investment vehicles is – the earlier you start saving, the better.