Frequently Asked Question
A pension is a government-designed, tax-incentivised pot of cash we can build to fund our retirement. There are basically three types of pension. The state pension, which anyone is entitled to and funded through our national insurance contributions – 35 years of which will get you full the state pension upon retirement. The second is the workplace pension, which is funded by contributions from ourselves, our employer, and topped up using government tax relief. Since 2012, if you are employed when you start work you will be automatically enrolled in a workplace pension scheme. The third type is the private pension, which can be set up separately and is funded by ourselves and topped up with tax relief.
The tax benefits that come with pensions are very generous: not only do they attract tax relief, but any investing gains or income made within the pension fund are tax free too. The downside is that you need to be of retirement age before you can access them. For the state pension, this is currently 66 (rising to 67 in 2028, and 68 in 2044); for private and workplace pensions, you need to be 55 (rising to 57 in 2028).
When you contribute to a pension, besides any employer contributions, you will also be given a helping hand by the government in the form of tax relief. The basic rate of tax will be automatically paid into the pot (the pension provider will deal with this for you) – meaning for every £4 you put into a pension, the government adds another £1 (a 25% bonus!). If you are a higher or additional rate taxpayer, you can also claim extra relief through HMRC and your self-assessment. Once you retire however, withdrawals will be taxed as income, depending on how much you withdraw in a tax year and where you are with your personal allowance.
The basic rate of tax relief will be automatically paid into your SIPP when you fund it. This means for every £4 you put into your SIPP, the government will add another £1. Higher rate taxpayers can claim additional relief through their tax return.
Across all your workplace and private pensions, the maximum you are allowed to contribute in a single tax year is £40,000 or 100% of earnings, whichever is lower. You are allowed to use your previous three years’ allowances if they are unused too, let’s say if you’re self-employed and earnings are lumpy. There’s also a lifetime allowance of £1,073,100, as of the current tax year of 22/23.
A SIPP is a form of private pension that gives you maximum choice in terms of the investments you’re allowed to make. Basically, any type of financial instrument may be invested in through a SIPP, depending on the offering at the investing platform through which your SIPP is held. If you are with one of the simplified platforms – we call them do-it-with-me (DIWM) investing services – then the investment choice may be more restricted, which is why their pension accounts can be simply referred to as a ‘private pensions’.
Within a SIPP, you are able to invest a wide range of assets, including individual shares and bonds, funds and other types of collective investments, as well as more specialised investments such as venture capital, physical gold, and even directly in assets such as commercial property. For the purpose of the SIPP providers we have looked at, the investment options tend to be more mainstream stock market investments that are relatively easy to buy and sell. It means you will need to be comfortable in making investment decisions for your portfolio. DIWM services such as PensionBee make it much easier if you find the options a bit perplexing.
You have a couple of options. Some retirees decide simply to draw on their pot. At 55, you are allowed to take 25% completely tax free as a lump sum or spread out over time, if you wish. The remaining 75% is taxable as income. Once you access the taxable portion however, you go into ‘flexible drawdown’, triggering something called the money purchase annual allowance (MPAA) meaning the annual allowance you’re allowed to contribute to receive tax relief reduces from £40,000 down to £4,000 (it stops you recycling cash for tax relief purposes). It means you need to consider carefully at what point you want to go into flexible drawdown as the tax benefits you lose will be substantial.
The other option is to use your pot to buy something called an annuity – a guaranteed stream of income that you will receive until you die, the size of which will depend on the size of the pot. Annuity rates are linked to interest rates, so they have been underwhelming by historical standards until recently when the bank of England started to raise the base rate of interest in response to inflation.
Some retirees will use a mix of the options above, perhaps using an annuity to cover living costs and drawdown for spending more freely.
The great thing about SIPP is that when you die, the pot will be handed to beneficiaries free of inheritance tax. In addition, if you are younger than 75 when you die, the pot can be drawn-down by beneficiaries completely tax free. If you are older than 75, any withdrawals from the pot will be treated as income for tax purposes.
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.
DIY platforms tend to represent the more established players in the market, such as AJ Bell or Hargreaves Lansdown. These services are usually full fat – with platforms offering a wide range of accounts like ISAs and private pensions, and a wide range of products, including many funds and individual investments like single shares and bonds. DIY services are for those who want to get involved and retain maximum choice.
DIWM platforms are the new breed of investing platform. Having emerged with brands like Nutmeg and WealthSimple around a decade ago, they tend to be a much simpler proposition, offering a fast and easy route to investing in the stock markets. Usually, you will be asked some quick questions around your appetite for risk and your financial goals, and then directed into one of a trim selection of risk-targeted portfolios. These tend to be very diversified across numerous funds and assets around the globe.
Unfortunately, we must be vigilant for scams, particularly if anyone is asking you to transfer funds to their service. Helpfully, the financial services’ regulator – The Financial Conduct Authority (FCA) – must authorise any company providing investing services, and as such, have a register which you can check to see if a company is genuine or not. Find it here.
Broadly, there are two sets of charges: fees charged by the investing service provider (the platform), and fees charged by the fund provider. Platforms fees are usually charged directly to your investment account, which means you tend to need to keep a minimum in cash to cover them. Investment fees are charged differently and taken directly out of the value of your investment in any particular fund. Different platforms will charge different amounts, and different funds will charge different amounts, so make sure you read the small print before investing as high charges have a surprisingly big effect on the returns you receive over the long periods of time. Email us if you’ve any questions here.
Advice is costly, but worth it if you have particularly complex financial affairs, or you simply don’t want to get involved in investment decision-making. Fortunately, we have a portal to two different comparison sites if you’re looking for a financial adviser – we call them do-it-for-me (DIFM) services. See here.
We have a free investing course that teaches you all the basics to get going. All you need to do is sign-up and we’ll send you a 15-minute email read each day for 7 days. By the end, you have a good enough grasp to get going and get investing! Find it here.