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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Everyone needs to make sure they are financially prepared for later life. Putting aside money today will help give you comfort in retirement.
You might not be giving up work for decades or you could be as little as a few years away from that milestone. Whatever your circumstances, it is never too early to start retirement planning and to give serious consideration to whether you might benefit by opening a SIPP (self-invested personal pension) and enjoying the flexibility and functionality provided by this option.
You can pick stocks, shares, funds or other asset classes to put in the SIPP and you are free to buy and sell them as you see fit.
The simple rule is that the money stays inside the SIPP until you reach age 55 – then it’s up to you when you access it. If you are younger and want to buy and sell shares and funds, and be able to withdraw cash when you want, then a Stocks and Shares ISA is likely to be more suitable. You can run both investment wrappers alongside each other; one for everyday investing to fund something like a holiday or children's education, the other as your pension to pay the bills and your lifestyle choices once you stop work.
There's now three main alternatives as to how you access your pension:
- Buy an annuity. This is an insurance-like product providing an income for life.
- Drawdown regular chunks of cash from your pension or take an income from your pension pot as and when you wish.
- Take your entire pension in one go.
Whichever way you access your money pot you are entitled to 25% of it tax free with the rest taxed as normal income.
A SIPP gives you flexibility, allowing a wide range of different investment choices, as well as offering options as to how benefits are drawn within the current rules.
What should you do if you don’t have a pension?
Although most of us will have some form of pension provision – particularly since the introduction of automatic enrolment in pension schemes for nearly everyone in work – you may not have significant savings for retirement.
The two biggest factors which determine how big your pension savings will be at retirement are how much you pay in and the length of time the money is invested. The next most important consideration is the performance of your pension funds, followed by charges.
Anyone with a company pension scheme should take advantage of this financial reward. Your employer will match a certain amount of money that you pay into a pension each month – effectively this is free money going into the pot to benefit you in later life.
Employers are able to pay into employee SIPPs as well as pension plans arranged by the company.
Personal contributions to a pension are paid net of basic rate tax with a rebate paid directly into the pension plan. So for a basic rate taxpayer every £800 paid into a pension is boosted by a £200 rebate.
At present higher rate (40%) taxpayers can claim an additional £200 of relief through their tax return – which reduces the cost of a £1,000 contribution to £600. Those paying the current additional rate of 45% can claim a further £50. Your maximum annual contribution is currently £40,000 and your lifetime allowance is £1.25 million, although the latter figure will fall to £1 million from April 2016.
When planning what to do with your pension, or considering planning to make provision for your retirement, one of the main things to consider is how much income you think you will need.
By the time you come to retire, some of your larger expenses like a mortgage may have been paid off so the level of income required will usually be lower than during your working life. Yet you may find yourself spending more on extras such as leisure activities and holidays.
There are three main types of private pension: a stakeholder pension, a personal pension and a SIPP:- A stakeholder pension has a limited range of fund choices
- A personal pension has much greater choice of funds
- A SIPP provides the greatest level of choice
A SIPP could be right for you if you are looking to build up a pension fund in a tax-efficient way, are prepared to commit to having your money tied up, normally until at least age 55 and want access to wider investment opportunities, such as a portfolio of listed stocks and shares.
You must understand investments go down in value as well as up so you could get back less that you invested.
There are two main options when opening an SIPP:
- You can make new contributions through monthly payments or a lump sum.
- You can transfer assets from any existing pensions.
By consolidating existing pension funds into a SIPP you may also find it easier to keep track of your retirement savings. SIPPs often provide more planning tools and calculators to help with your choices than traditional pension schemes. You can often also find investment research to help you pick funds and online functionality, meaning you can view your SIPP online any time of the day or night and with some providers via mobile apps.
The process should be relatively simple. In theory all you need do is contact your SIPP provider and provide details of your existing pensions. They will then arrange any transfers.
The types of pension which can be transferred to a SIPP include:
- Personal pension plans
- Stakeholder pension plans
- Retirement annuity contracts
- Other SIPPs
- Free standing additional voluntary contribution plans, also known as FSAVCs
- Executive pension plans
- Most paid-up occupational money purchase (defined contribution) plans
However you should consider taking advice from a suitably qualified financial adviser before transferring any pension to make sure it is the correct decision for you as you may lose valuable benefits.
Leveraged instruments are not an option when it comes to SIPPs but you can still typically invest in a wide range of funds, Main Market-listed and AIM-quoted shares, exchange-traded funds (ETFs), investment trusts, convertible securities, government and corporate bonds, and sometimes warrants.
Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. Comments published in this article must not be relied upon by investors when they make their investment decisions. Investors who require advice should consult a properly qualified financial adviser. AJ Bell Media Limited and its staff do not, under any circumstances, accept liability for losses suffered by investors as a result of their investment decisions.
Shares is published by AJ Bell Media Limited part of AJ Bell.
Written by:
Dan Coatsworth
Dan Coatsworth is an Investment Analyst and Editor in Chief at AJ Bell. He has been with the company since December 2012 and has 19 years' experience in the industry, commenting on the markets and all things investing. He has a degree in Corporate Communications from Southampton Solent University.
Dan is heavily involved in the content published by AJ Bell, which includes providing market commentary, starring in our educational videos, writing for Shares Magazine and co-presenting our Money and Markets podcast, as well as hosting and presenting at events for customers – both in person and online.
Dan’s passion lies with educating customers all about investing and staying informed about market events. He previously worked for Teletext on the business and personal finance desks which taught him the importance of telling a story in as few words as possible. He has also contributed to Times Radio, LBC News, The Telegraph, Evening Standard, Mail on Sunday and The Week.
A fun fact Dan learned about investing early on was to not get caught up on the hype around certain stocks. He found this out himself when the first share he bought was a company trying to recover copper from a shipwreck at the bottom of the ocean… this sounded exciting but sadly didn’t make him any money! Outside of work, Dan enjoys swimming and live music.