Making a start to any enterprise is often the hardest part – so if you have opened a SIPP (self-invested personal pension) you have already taken one of the most important first steps towards a more comfortable retirement.

This article will talk you through the next steps so you can start putting your money to work in the global stock markets and grow your wealth.

STEP ONE: ASSESS YOUR CURRENT RETIREMENT PLAN

Retiring for some people might be a long way off but there are real benefits to starting investing and saving for it early. Whatever the time horizon, the most important thing to do first is to assess your current retirement plan.

If you are employed rather than self-employed you will be automatically enrolled in the company’s workplace pension scheme (unless you opt out). This is valuable because for every 5% of your earnings per month paid into your workplace pension, your employer must pay 3%.

There is also another type of workplace pension called a defined benefit (DB) or final salary pension scheme. This provides an income for life and is usually based on your salary and the number of years you have been a member of the scheme.

A SIPP can be a useful way of supplementing an existing workplace pension and some employers may even pay pension contributions directly into a SIPP. If you have accumulated several pensions through the course of your career these can be consolidated within a SIPP, with plans for a pension ‘pot for life’ announced in the Autumn Statement still very much an aspiration rather than anything which is close to fruition in the near term.

The Pension Tracing Service  is a useful tool to locate missing pensions, and some providers also may be able help.

There is also the state pension. The full ‘new’ state pension is worth £203.85 per week in 2023/24 but you may get more or less, depending on your national insurance record.

You’ll qualify for payments when you reach 66, but this is scheduled to rise to 67 between 2026 and 2028.

In the future, however state pension provision might not be as generous, this simply adds to the case for supplementing your retirement income with the SIPP you have just opened.

SIPPS AND PENSIONS THE BASICS

A SIPP is the most flexible type of personal pension. It allows you access to a wide range of different investment choices and gives you
a number of options on how you draw your cash when you reach 55 (or 57 from 2028).

Pensions benefit from tax relief. Therefore contributing to one can be a good use of cash that isn’t needed to repay expensive debts or pay bills. Thanks to the generous tax relief on offer, £1,000 paid into a pension will automatically be topped up to £1,250 via 20% basic rate tax relief based on the total contribution.

Those who pay a higher rate of tax can claim an additional 20% through their self-assessment tax return or by contacting HMRC.

If your taxable income is over £150,000, you’ll pay a tax rate of 45% on everything over this threshold. You can claim additional tax relief on that amount – an extra 5%, to give you 45% tax relief in total on all pension contributions from your income over this threshold. In Scotland slightly different tax rates apply.

While SIPPs benefit from up-front tax relief any income drawn from them is subject to taxation (unlike ISAs).

You have three main alternatives at retirement: buy an annuity (an insurance-like product providing an income for life); drawdown regular chunks or income from your pension pot as and when you wish; or take the lot in one go. Up to 25% of your pension can be taken tax-free with the rest taxed as normal income.

STEP TWO: DETERMINE THE INCOME YOU WILL NEED IN RETIREMENT

Ideally, a SIPP will be able to provide you with enough cash for a retirement suitable for your needs. It is important to remember that these needs vary from person to person.

You may want to travel the world in retirement, buy a holiday home, need to factor in care costs (if you or your partner have a terminal illness), you may want to downsize from the family home or pay for the grandkids’ university education.

In March 2023 consumer watchdog Which? surveyed 5,000 retirees about their spending habits.

For a single person to fund a ‘basic’ retirement lifestyle where essentials are covered (food, transport, utility bills) an income of £13,000 per year is needed, for couples £19,000.

Spending rises to £20,000 (£28,000 for couples) when you include some leisure spending, and £32,000 (£44,000 for couples) to include luxuries such as extended long-haul holidays.

The Which? survey has concluded that people living alone will need a total pot of around £173,000 alongside their state pension to achieve the ‘comfortable’ target of £20,000 a year, assuming they access their savings via pension drawdown (drawdown figures are based on a saver withdrawing all their money over 20 years from age 65, and assume investment growth at 3%, inflation at 1% and charges of 0.75%).

If you opt to buy an annuity, which gives you a guaranteed income for life, that figure rises to £182,000.

Meanwhile, couples would need to aim for a combined pot £115,000 if opting for drawdown, or £131,000 if buying a joint-life annuity.

If aiming for luxury retirement target of £32,000 a year (£44,000 for couples) as specified by the Which? survey, you’d need a total pot worth at least £400,000 – or £420,000 for couples. All of these pot sizes reflect how much you would need in private pensions to achieve this level of income.

CASE STUDY: PHOEBE IS GETTING STARTED EARLY

Brighton-based Phoebe is an 18-year-old student who has just started college. She has always been fascinated by investing and is keen to plan for retirement even though it is a long way off. Phoebe has a very long-time horizon so she can afford to be ‘adventurous’ in her investment selection gaining exposure to emerging markets and more moderate assets like corporate bonds and commercial property. Among Phoebe’s investments is JP Morgan Emerging Markets Income Fund (B5M5KY18) which invests in a mix of Chinese, Taiwanese, South Korean, Mexican, Hong Kong, Indian, Indonesian, and Brazilian equites. It has a dividend yield of 3.86% and over 10 years it has delivered an annualised return of 5.39%. The ongoing charge is 0.88%.

STEP THREE: DECIDE HOW MUCH YOU CAN INVEST

It is worth setting aside some time to go through regular outgoings and work out how much you could find for pension contributions. Even if you start small to begin with you can always build your contributions as you are able to.

You need to be aware of the annual limits on what you can contribute to a pension – which is for all pensions you have, rather than per pension. For most people that annual allowance will be £60,000, but you also can’t put more into your pension than you earned in any year – so if your earnings are lower, your annual limit will be too. The lifetime allowance is set to be abolished from 6 April 2024 so you can accumulate pension pots of any size without penalty.

STEP FOUR: CONSIDER ALL THE CHARGES

Setting up a SIPP is completely free with most platform providers. For example, with AJ Bell, setting up your account is free, paying money into your account is free, it is free to access your SIPP and there is no inactivity fee.

However, there are funds custody charge on the AJ Bell platform, for example, (including unit trusts, OEICs and structured products) – 0.25% on the first £250,000 of funds, 0.10% for funds between £250,00 and £500,000 and no charge on the value of funds over £500,000.

There is a shares custody charge (including investment trusts, ETFs, gilts, and bonds), of 0.25% (maximum £10 per month).

For buying and selling investments per deal. It is £1.50 for funds (including unit trusts and OEICs) online, £9.95 for shares (including investment trusts, ETFs, gilts, and bonds online) and £4.95 for shares where there are 10 or more share deals in the previous month.

CASE STUDY: JAMES AND CHARLOTTE ARE TAKING A CAUTIOUS APPROACH

James is a 32-year-old estate agent from London, and his wife Charlotte is a 28-year-old teacher. James has a workplace pension with his employer, but he is keen on supplementing his retirement income by opening a SIPP. His wife Charlotte is happy with her pension for now – she has a defined benefit pension scheme from the Teachers’ Pension Scheme (TPS). He has decided to adopt a more cautious approach to his portfolio and grow his money over time. One of James’s investments is Artemis Strategic Bond Fund (B2PLJR10). The fund aims to provide a combination of income and capital growth over a five-year period. The fund invests 80% to 100% in debt and debt-related securities. 

It has a dividend yield of 4.58% and an ongoing charge  of 0.59%.

STEP FIVE: DECIDE WHAT TO INVEST IN

Using a SIPP to save for your retirement offers many benefits, for one you can manage your pension yourself and have financial control.

When selecting what to put in your SIPP you can choose from investment trusts, funds, shares, bonds and exchange-traded funds (ETFs).

However, make sure you do your research before putting money into any investment. A good starting point is Shares – as a digital magazine we cover a range of investments as well as educational material to aid your understanding of the markets and investing.

Other useful sources of information include the personal finance and business sections of newspapers and your investment platforms, or you could look at financial data platforms including SharePad and Stockopedia which offer useful screening tools. Though these come with a subscription charge.

Whatever you choose to do it is best to have a diversified portfolio – to spread the investment risk. Diversification means not just different products but various regions, asset classes and sectors.

If you have several more decades of working life before you retire then you can take on a reasonable amount of risk as you have time to see out any ups and downs in the market. This might mean investing in areas which potentially offer higher growth like emerging markets and technology.

One approach could be to invest in a product like Fidelity Index World (BJS8SJ3) which offers exposure to a broad basket of developed market stocks for an ongoing charge of 0.12%. From this core building block, you could then create a more diversified portfolio with exposure to different sectors and themes depending on your appetite for risk.

The nearer you get to retirement, the less risk you might want to take on particularly if you plan to buy an annuity.

BUYING AN ANNUITY

An annuity can give you a guaranteed income in return for some or all of your pension pot. These annuities can provide an income for life or for a fixed period of time. The amount of money you receive in retirement depends on how much you put it in your lifetime and your annuity rates at the time of retirement – these have improved thanks to higher interest rates.

For example, Tariq has £300,000 in his pension. He chooses to take £100,000 out of his pension, leaving him with £200,000. He takes the first 25% as tax free lump sum of £25,000. He then uses the remaining amount of £75,000 to buy an annuity which pays him an income (which is taxed).

The rest of his pension stays invested until a later date when he can buy another annuity or choose another option, for example drawdown. Buying an annuity means crystallising the value of a least a portion of your pension so you would need to bear this in mind when the purchase point approached so you weren’t caught out by short-term market volatility.

STEP SIX: MAKE THE TRANSACTION

For a one-off investment in your SIPP, you will start by clicking on the deal or trade button. Remember to check you have enough cash on your account to fund any charges. Your account can be funded through a lump sum or regular payments through a direct debit.

Before you invest in a fund, you will need to confirm you have read the necessary information about a fund including the Key Information Document or KIID.

It often takes a day for the order to buy a fund to be processed and completed. For a transaction in shares, investment trusts and ETFs you will be provided with a time-limited quote to buy (or sell) at a certain price. In an equivalent way to funds you can either select how much money or how many shares you want to trade. You will then be shown the total cost of the transaction.

Once you have made your first investment then, congratulations you are a fully-fledged SIPP investor.

CASE STUDY: SALLY USING A SIPP TO CONSOLIDATE PENSIONS

Sally is single in her late 40s with no partner or children. She has been working for 30 years in public relations. In that period, she has worked for several employers and accrued five small pension pots from each workplace.

Sally is looking to combine her small pensions in one pension pot through a SIPP which will give her more financial control of her investments in the run up to retirement.

With another 15 to 20 years until retirement, Sally has decided to take a ‘balanced’ approach to invest in her recently opened SIPP. She has decided to invest part of her SIPP in Jupiter UK Special Situations (B4KL9F89). The fund aims to provide a return higher than that provided by the FTSE All Share over the long term (at least over five years). At least 70% of the fund is in shares of companies based in the UK. The ongoing charges are 0.76% and the 10-year annualised return is a smidge over 6%

DISCLAIMER: AJ Bell referenced in the article owns Shares magazine. The author of this article (Sabuhi Gard) and the editor (Tom Sieber) own shares in AJ Bell.

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