What are pensions?
There are broadly three types of pension: state pensions, workplace pensions and personal pensions. The state pension is offered to everyone – you just need to pay 35 years of national insurance contributions to be eligible for the full pension. Workplace pensions are offered to anyone employed though auto-enrolment. But if you’re not employed and don’t have access to a workplace pension, or indeed you are but want save more for your retirement – there are personal pensions like SIPPs.
Personal pensions are a tax efficient way to save for retirement and available through most investing platforms. Not only are investment gains and income sheltered from the tax man, the government also incentivises them by offering tax relief. In other words, they will help you grow your pot by adding back income tax paid on the amount contributed.
How does a Self-Invested Personal Pension (SIPP) differ from other private pensions?
Just to make things confusing, a SIPP is one of three types of personal pension and offers a wide range of investment options and choices. The others, including stakeholder pensions and standard personal pensions, tend to be more limited in choice.
All of these are what we class as defined contribution (DC) pensions. It means what’s important is what you put into them – your contributions. But that’s not all. Tax relief boosts your invested cash, which then grows free of any other taxes. When you add some smart investment decision-making, and hopefully good returns – all of this impacts the outcome you receive at retirement.
Are SIPP accounts worth it in 2023?
SIPPs give you full control over this vitally important goal. Not only do they offer the opportunity to scoop-up all of your old pensions and keep them under one roof, they also let you take control of the wheel: deciding how much you want to contribute, the investing platform you want to use, and the investments you wish to make. But it means you need to be comfortable in making the investment decisions too, which can be daunting. If you’re not, or indeed only want to make fairly small contributions, then simpler personal pensions such as stakeholder pensions may be more suited.
Are there limits on SIPP contributions?
Yes, there are limits to contributions, above which you would need to pay tax on:
- Up to 100% of earnings per year; or
- £40,000 per year (across all pensions);
- £1,073,100 over a lifetime
Are there limits on SIPP withdrawals?
You can only access your SIPP’s funds at 55 at the earliest, rising to 57 in 2028 (unless you are terminally ill). From this age, 25% of the fund may be withdrawn completely tax free, however the remainder will be subject to income tax, depending on how much you withdraw each year.
How you use the funds to generate an income is up to you. You can keep some invested, take lump sums, draw an income, buy a guaranteed income stream known as an annuity if you don’t want to worry about stock market risk, or mix and match any of these options to suit your liking. At this point, sometimes buying the services of a financial adviser can be worth their salt.
What happens to my SIPP if I die?
If you die before the age of 75, then the whole pot can be passed on to your beneficiaries tax free. If you die after the age of 75, it will form part of your taxable estate and therefore potentially be subject to inheritance tax.
What can I invest in?
A SIPPs’ investment options are usually wide-ranging. These include:
- Company shares
- Investment trusts
- ETFs and trackers
- Property and land – just not residential property
Should I invest in a SIPP account or ISA or both?
If you can, fill your boots and have both. ISAs have excellent tax breaks and are very useful for nearer term financial goals that come before retirement, such as saving for a house. You’re allowed up to £20,000 in contributions each tax year, and unlike pensions like SIPPs, withdrawals can be made at any time. SIPPs are more generous as they add tax relief, but of course, they can only be draw down later in life. Having both should cover all eventualities when it comes to your financial future.
I have a LISA account already, can I still open a SIPP account?
A LISA – or Lifetime ISA – is a type of ISA that may be used for either a first time property or if you are beyond the age of 60 – which admittedly draws some similarity to a pension like a SIPP. None-the-less, it is still an ISA and can therefore be opened alongside a SIPP if you wish.
Is it easy to transfer SIPP accounts from one provider to another?
In short, it’s not the worst process but it can take some time. There are a few reasons why you might want to switch your SIPP to a new service. First, overly high fees can seriously erode your gains over time. Second, a different provider may have a better choice of investments for your financial needs.
To start with the transfer, speak with your new SIPP provider to get going. Cash transfers usually take just a few weeks, however if it’s ‘in specie’, meaning your current investments are being transferred as they are, then it can take a few months. What’s more, with in specie transfers you may be charged per investment transferred – ouch!
Whether you can do this depends on the investments your new provider accepts and trades in: if it doesn’t have them, then your current provider will need to liquidate your holdings. If this is the case, it is wise to check if there’s dealing fees involved when you sell down the investments to raise the cash. It also means you will spend time out of the market before you buy back into your investments with the new provider following the transfer – costly if there’s a big jump in the stock markets.
Can I have multiple SIPP accounts?
You may open multiple SIPPs if you like. Some investors like the comfort of not having all their money with a single provider; some might like splitting their retirement savings with a simple robo-adviser like PensionBee as well as a full-fat platform like AJ Bell. Just be aware of the rules regarding annual contributions on the tax relief you can claim, and of course, the lifetime allowance. Too many accounts and you may also find them a lot of administer.
Can I open a SIPP account if I have a workplace or private pension?
In addition to a workplace pension (and your state pension), you may wish to open a private pension like a SIPP to max out your annual allowance on contributions and make the most of your retirement savings. Before doing so, just check with your workplace pension to see if they match any extras – known as additional voluntary contributions (AVCs) – as on top of tax relief this would be very generous and may be best to maximise first.
What mistakes should I avoid when choosing a SIPP provider and opening a SIPP account?
Help is at hand! We’ve analysed the top 10 SIPP providers from across the country using our extensive knowledge of platforms and investments, and broken them down into the list below. Click ‘find out more’ to go through to our analysis of the individual provider – there’s even video reviews for some of them, and we’re adding more all the time.