Put simply, SIPPs are another way to save for your retirement; contributing your spare cash into a personal pension pot that has excellent tax relief benefits.
Coming with many advantages, this option could help you reach the retirement you’ve always wanted, particularly if you’re looking to track down and combine any past pension pots you may have (or if you’re self-employed and missing out on a typical workplace pension scheme).
There’s plenty of confusion around pensions, but it doesn’t need to be a reason to put you off exploring the right option for you — we’ve laid out the benefits to having a SIPP to help clear the confusion.
- SIPP benefits
- Tax benefits
- Pros of pension consolidation
- SIPPs for the self-employed
- How do I set up a SIPP?
SIPP benefits
A Self-Invested Personal Pension sounds like a lot of responsibility for your future pension fund, but don’t let its phrasing of ‘self-invested’ confuse you or put you off. The distinction here is that rather than someone else deciding how your retirement money is invested, as it would in a traditional workplace scheme — you can choose a provider that will invest it and use a strategic plan to help you grow wealth in a way that suits you best.
That’s the first major benefit of a SIPP, but here’s some more on the list:
- A boosted retirement fund, alongside your State Pension and workplace scheme, meaning your investments could grow beyond what you contribute. However, be mindful that you can also receive less than you put in;
- The option to consolidate your past pension pots to make it easier to manage;
- Rather than waiting for your State Pension age, you could have more flexibility with withdrawing around retirement age (currently 55, but rising to 57 in 2028);
- Plus, you’ll receive a government tax relief top-up on any personal contributions you make, but this does not apply to transfers of existing pots.
Control over your pension pot
With a SIPP, you get to take control of your retirement. Typically, with a State Pension, contributions are made on your behalf, and you don’t have a say on how much goes into your pot. Likewise, a workplace pension scheme is usually decided by the organisation, and their chosen pension provider invests with their defined objectives in mind.
With a SIPP, however, you could gain access to a wide range of investments, such as shares, bonds, and property. If you decide the SIPP advantages sounds like a better option for you, you can choose an investment style that suits you – ranging from Cautious to Adventurous, and Original or Ethical – for your Self-Invested Personal Pension.
If you’re more comfortable using a digital platform that does it all for you, you’ll be able to choose your investment style to determine how your money’s invested. With Wealthify’s SIPP, for example, you can choose an investment style that suits you, ranging from Cautious to Adventurous.
If you opt for Cautious, your money will mainly be invested in more bonds; while Adventurous Investment Plans have a larger portion of shares. The choice is totally up to you.
We also believe in giving people the option to invest ethically, if that suits their values and long-term aspirations. Our Ethical SIPPs invest in companies that are striving to do their bit for the future, and are closely monitored in-house, with all funds regulated by the Principles for Responsible Investment (PRI).
Flexibility
Paying into a SIPP means you have more flexibility over your retirement options. You can start withdrawing from your pension when you turn 55 (rising to 57 in 2028), with the option to take the first 25% of your money as a tax-free lump sum.
Also, many SIPPs, like the Wealthify Personal Pension, will let you choose how to take your funds out; known as ‘defined contributions schemes’. You’ll be able to either withdraw your whole pension as a lump sum in one go, take out lump sums when you need them, or get paid a regular income based on your pot size.
Boost retirement income
Many people think they’ll be just fine with the State Pension, but research would suggest otherwise. A recent study, found that a single person relying on one income with a ‘medium retirement’ would need at least £14,400 a year to cover basic needs [1].
With the full State Pension currently set at £11,502.04 (£221.20 per week multiplied by 52 weeks), you may struggle to cover all your expenses and make ends meet in later life. So, it’s important to consider other pension options to help boost your future retirement income.
If you’re paying into a workplace pension and your finances are in good shape, you could increase your contributions.
Also, it could be worth having a look at SIPPs. Since you can make your own contributions, paying into a SIPP could be a great way to boost your retirement — and the good news is you don’t need to pay in big lump sums.
Investing little and often could also help you build a decent retirement pot. For example, if you put £50 a month in your Wealthify Pension and let your money work for 40 years, you could end up with £61,213.98 [2].
SIPP tax benefits
While pensions tend to have a positive reputation for being tax-efficient across the board, there are some specific tax benefits to know when it comes to a SIPP:
SIPP tax reliefs
If you’re enrolled in a workplace pension, you’ll need to contribute at least 3% of your pay (your employer and the government will top this up, depending on your contract and workplace policy).
With a SIPP though, there’s no such rule. You can choose the exact amount you want to contribute, although most people only contribute up to their pension allowance limit in a year. For basic rate earners, that means contributing up to your total income for the year, or £60,000 (whichever is lower) including employer and government contributions too — to ensure you are taking advantage of the pension’s tax benefits.
With a Wealthify SIPP account, you also get a 25% tax relief top-up from the government on everything you contribute to a SIPP, and can claim even more through a self-assessment if you are a higher or additional income earner.
SIPP inheritance tax
As with many types of pensions, you can name beneficiaries to receive your pension money in the event of your death. This is true of a SIPP, and the good news is that as long as your trustee agrees with your wish to pay specific people you nominated as beneficiaries (also known as their ‘discretionary’ choice), then the money is usually free from inheritance tax.
Pension consolidation benefits
Why do people tend to combine their past pension pots? Well, because you could:
- Potentially save on paying multiple fees from different providers;
- Have an easier-to-manage experience with all the pensions in one place;
- Experience simpler paperwork for your loved ones when you pass away and leave them your remaining funds;
- Potentially benefit from compounding interest (if the singular larger pot earns you better returns than keeping them separate);
- Enjoy more flexibility and control for your investments versus pension schemes that don’t suit your investment style.
Combining your past pensions is easier than you may think! Check out our pension transfer page for more information, and you could get started with a Wealthify SIPP in one go.
SIPP for self-employed benefits
If you’re self-employed, a SIPP could help you save more towards your retirement, especially by taking advantage of its tax-relief benefits.
In the UK, there are about 4.29 million self-employed people [3], and only 20% of those earning over £10,000 a year are saving towards their pension [4]. Needless to say, the situation is challenging, but it’s not hopeless. If you’re self-employed, it’s possible to take control of your finances for later life.
Make sure you’re on top of your own National Insurance contributions and consider opening a SIPP. That way, you’ll have a pot where you can put money aside for your retirement.
If you’re a contractor or freelancer, it could be a good option to explore for the following reasons:
- The flexibility it offers by letting you contribute as and when you can afford to;
- More control over how your money is invested;
- The 20% tax relief top-up you get to offset the tax you’ve already paid on your money;
- The tax-free lump sum you can take at withdrawal age.
How do I set up a SIPP?
While SIPPs may not be right for everyone, if you’re comfortable with the considerations that come before opening one, then it’s simply a case of doing your homework and choosing the right SIPP provider for you. These considerations include age restrictions, and how the money you withdraw is taxed.
We’ve rounded up some pointers about our Wealthify SIPP, to help you decide:
- Easy transfers from past pension pots; just tell us a few basic details, then we'll do the rest.
- Our in-house investment experts will manage your pension for you.
- Low fees; Wealthify has a simple annual management fee (0.6% per year up to £100,000, dropping to just 0.3% for any portion above that) but we don't charge you to deposit money, transfer, or close your Plan.
- Investment styles that suit you; with five different investment styles available, from Cautious to Adventurous, you can have a pension pot that has your investment intentions in mind.
- Ethical investing in just a few taps; opt for investing ethically and we’ll only invest in organisations committed to having a positive impact on society and the environment on your behalf.
- Wealthify automatically adds the 25% government top-up to all new contributions you make to your pension, giving you one less thing to worry about.
- Please be mindful that you won’t be able to transfer any existing past pensions with a ‘defined benefit’ (often seen in public sector pension schemes) to Wealthify.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
References:
1: https://www.retirementlivingstandards.org.uk/
2: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £36,513.10. If markets perform better, your return could be £123,773.76. Values correct as of 09/12/24.
3: https://researchbriefings.files.parliament.uk/documents/CBP-9366/CBP-9366.pdf
4: https://www.financialfairness.org.uk/docs?editionId=295fe324-d57a-40e4-affb-b1e6007d03b6
