When it comes to retirement planning, you need to understand how pensions work. Simply put, a pension is the total amount of money you receive when you exit the workforce. And depending on your location, there are essentially two types of pensions most people receive, and they all come with their rules and benefits – state pension and workplace pension. However, if you’re looking to take further control of your savings and the financial cushion you build for the future, there is a third option you can choose – a Self-Invested Personal Pension or SIPP.
In case you haven’t heard of this pension plan, allow us to walk you through what SIPP investments are and the benefits they offer.
What is a SIPP?
A Self-Invested Personal Pension is essentially a do-it-yourself pension. It provides a cheap, flexible, and straightforward way to save for your retirement. More importantly, it puts investors in full control of their finances and performance. However, it also means that the investor is responsible for building and managing everything, and therefore, they carry more risk than other pension types.
Who should consider SIPP investments?
As long as you’re a UK resident or a Crown employee under 75, you can opt for SIPP investments. Anyone looking to invest in them should seek advice from finance professionals before diving. Generally, this pension is suitable for:
- People who regularly manage different types of investments.
- People with a larger pension plan or significant periodical contributions.
- People with a strong financial background or advisors.
- People looking to take full control of all their pensions.
- People that want to convert pension into a source of passive income.
5 benefits of investing in a SIPP
A SIPP is not too different from a standard government or workplace pension but it gives holders more freedom and control over their finances in the long run. Here are the 5 main benefits of SIPP investments:
- More Control Over Savings
With a SIPP, you can control your savings and how much of it goes into your retirement. Typically, state pension contributions are determined by the government and therefore, beyond your control. Similarly, employees enrolled in a workplace pension must contribute at least 5 percent of their pay while their employer adds a certain percentage of their pay from their end into the pot. With a SIPP, you can choose exactly how much you want to contribute.
- More Investment Options
By opting for a SIPP, you can diversify your savings by investing in a wide variety of financial assets, such as:
- More Flexible Retirement Options
Unlike state or workplace pensions, a SIPP offers greater flexibility over your retirement options, For instance, holders can start withdrawing from their pot as soon as they turn 55. Many companies offer claims advice and different ways for holders to take their funds out. Whether you want to draw your whole pension in one go or take out monthly payments, it is up to you.
- SIPP Tax Benefits
Like state pensions, SIPPs also offer great tax benefits. For instance, if you contribute £10,000 to your SIPP, the government will contribute £2,500 from their end. And UK taxpayers with higher rates can claim even more tax relief depending on their health, financial circumstances, family structure, and tax rules, etc. As aforementioned, anyone under 75 can pay into a SIPP. Even if you’re not earning, the SIPP tax benefits all you to contribute up to £2,880 net each tax year and receive tax relief.
SIPPs work differently to stocks and shares ISAs, in that deposits into stocks and shares ISA doesn’t attract a top-up from the government.
Please note that financial planning should consider more than just taxation. Tax rules may change and you should perform your own research on the tax implications of different products. Depending on your personal circumstances they may have greater or fewer benefits for you.
- Better Retirement Income
Most people like to believe that they’ll be just fine with the state and/or workplace pension. However, research suggests that you need over £10,000 every year to cover basic needs after retirement. Unfortunately, the current state pension might not be enough to make ends meet, especially if you have occasional miscellaneous or emergency expenses to take care of. Since SIPPs allow you to make your own contributions, you can boost your savings. For example, if you put just £50 every month for 40 years, you could end up with over £70,000 in the future.
Which stockbrokers offer SIPPs?
Please see the following reviews for brokers which offer SIPPs:
SIPPs are relatively complex products from a regulatory perspective. Therefore you will see mainly the larger broker offer SIPPs, as their experienced compliance teams are able to economically handle the creation and administration of such investment accounts. Newer investing apps such as Dodl, or international brokers such as eToro are less inclined to setup multiple country-specific accounts as this would create an administrative burden to replicate in other territories.
If you’re considering opening a SIPP to save for retirement, you must look for the best options available near you. You can look for firms online that sell them, compare their options, fee structures, payment modes, and terms & conditions. All these factors and more can affect how much money is available to you when you retire.