Could a SIPP be right for you?
Saving for retirement can sometimes seem a daunting task. This situation isn’t helped by the fact that many of us today have a hotch-potch of different pension plans.
This is likely to include various company pensions, private pensions and investments, as well as the state pension.
It is estimated that the average person has around 11 different jobs throughout their career* and some will have significantly more. Thanks to the Government’s auto-enrolment programme, each time we switch jobs we are now enrolled into a new workplace pension plan.
Around one in five workers who have multiple pensions admit they have lost track of at least one of these savings plans
This initiative has proved to be a great way to boost overall pension savings, but it has created the additional challenge of keeping track of all these various savings pots.
According to recent research around one in five (22 per cent)** workers who have multiple pensions admit they have lost track of at least one of these savings plans.
Consolidating these savings into a single pension plan can make a lot of sense, and self-invested personal pensions - or SIPPs - are an ideal way to do this.
SIPPs aren’t just for higher earners, or those who have built up substantial pension savings. They are also a useful savings vehicle for those looking to consolidate and grow their own pension savings.
There are a number of benefits to taking out a SIPP. First and foremost it makes it easier to see exactly how much you have accumulated to date - and from there work out how much you need to be saving each month to meet your retirement goals.
By having a centralised pension pot you are also far less likely to lose track of older or smaller pension pots, perhaps from when you started working.
Investment Freedom
With a SIPP it’s also easier to keep tabs on where your money is invested - and how these investments are performing.
Many company pensions will automatically invest your money in a “default” fund. With SIPPs you have far more control and choice over where this money is invested.
This means investors can ensure they have a balanced and diversified portfolio.
SIPPs offer a wide range of different investment options, including funds and direct shareholdings, both in the UK and overseas.
Investors don’t have to stick to equity markets either, there will be options to invest in fixed income, commodities and commercial property funds for those looking for more diversification.
Investors can also choose between low-cost passive funds or ETFs, or can select the active fund managers with the best track records of delivering outstanding returns — or select a combination of the two.
SIPPs also offer the flexibility to allow investors to switch holdings as and when they choose: for example as you near retirement you may want to “de-risk” your portfolio or move into less volatile fixed income investments.
Many SIPPs will also offer drawdown options, allowing investors to take an income, or capital from their pension once they reach the age of 55.
Make the most of tax benefits
As with any other kind of pension, SIPPs offer tax-relief on contributions of up to 45 per cent - helping to boost the overall value of your holdings. There is an annual allowance of £40,000 a year.
Those who don’t earn can still put up to £3,600 into a pension and get tax relief on this contributions (otherwise the maximum amount is the amount earned in a year, provided this doesn’t exceed £40,000).
Should you consolidate all your pensions?
Consolidation may not be right for everyone. If you are currently contributing to a workplace pension your employer is likely to also be making contributions on your behalf. In almost all cases you will need to keep contributing to this company pension to get these payments topped-up by your employer.
However, there is nothing to stop you running a SIPP alongside this, and using it to consolidate pensions from previous jobs, where there won’t be any additional money being paid in.
Likewise those who are self-employed and don’t have access to a workplace pension should also consider SIPPs.
Those in a defined benefit (DB) pension scheme should always seek financial advice before transferring their pension to a SIPP, as a SIPP is not suitable for everyone and could see you giving up a guaranteed income in retirement.
* Department for Work and Pensions, page 19 (LINK)
**Aegon (LINK)
A Self-Invested Personal Pension (SIPP) can help boost your retirement income. Take control of your retirement pot and benefit from up to 45 per cent tax relief.