This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Have you ever checked what your workplace pension is invested in? It may be that you are on a very good scheme. For many, however, the fees could be high and the range of choice limited. If you are looking to take more control of your retirement investments and their costs, then a SIPP (self-invested personal pension) may be worth looking at.
In this article, our team at Elmfield Financial Planning here in Padiham, Burnley, explains how a SIPP works, its pros and cons and how it can fit into a retirement plan. We hope you find this content useful. If you’d like to speak to an independent financial adviser then reach us via:
T: 01282 772938
What is a SIPP?
There are many different types of pension. One is the state pension, which is income provided by the government after you reach state pension age (based on your NI contributions). Apart from this, there are two other types: workplace pensions and personal (or private) pensions. A SIPP typically falls within the latter category.
You can set up a SIPP yourself or with the help of a financial adviser. Afterwards, you will be the one responsible for making contributions. This is in contrast to a workplace pension, which your employer sets up – and puts at least 3% of your salary into.
You can keep a workplace pension going alongside a SIPP, to keep benefitting from employer contributions. In some cases, however, you could convince your employer to contribute to your SIPP instead of your workplace scheme.
Pros & cons of a SIPP
The main advantage of a SIPP is it allows you to access a wider range of investments than a typical workplace pension scheme. These might include gilts and fixed-interest stocks, direct quoted equities, investment trusts and trustee investment plans.
Just like a workplace pension, a SIPP receives tax relief on the contributions. For a Basic Rate taxpayer it only “costs” 80p to put £1 into a SIPP (20% relief), and for a Higher Rate taxpayer the savings are even better at 60p for every £1 contributed (40% relief). As with all non-state pensions, you can only access the money after age 55 – or 57, as expected in the future.
The other benefit to a SIPP is the potential cost saving on your investments. Whilst a workplace pension might charge over 1% a year just on the funds it offers, a SIPP can offer charges (for holding funds) as low as 0.15%. Over the years, this could add up to £10,000s which goes into your pension – rather than the hands of fund managers.
The main drawback of a SIPP, however, is that the sheer range of investment choice can feel paralysing to many people. A provider might offer dozens – perhaps 100s – of different funds and assets for you to include. Here, a financial adviser can help you sift through the options and find a suitable blend which reflects your risk appetite, investment horizon and financial goals.
Using a SIPP in retirement planning
Any SIPP needs to fit into your wider financial plan. There are a range of things to consider here with your financial adviser. First of all, be careful about stopping your workplace pension out of a desire to open a SIPP. Bear in mind that your employer must add at least 3% under the UK’s auto-enrolment rules. Also, many employers will match your contributions up to, say, 8%. If so, consider taking full advantage of this; it represents “free money”.
Secondly, make sure that whatever you put into a SIPP is money that you are comfortable not accessing until your late 50s. Thirdly, be mindful of your allowances. In 2020-21, the annual allowance rules limit you to putting up to £40,000 into your pension(s) each year (or up to 100% of your salary; whichever is lower). The Lifetime Allowance, moreover, allows you to save up to £1,073,100 in total across your pensions. Be careful, therefore, that your SIPP contributions do not take you over these limits – especially if you contribute to a workplace scheme as well.
Fourthly, consider seeking financial advice about picking a good SIPP provider. Some will limit you to only investing in their own funds, for instance. Others will impose higher charges or a different charging structure (i.e. a flat-rate versus a percentage of your assets). On this latter point, the best provider for you may depend on how much you have to invest in your pension. Finally, be careful to take full advantage of the tax reliefs on offer with your SIPP – particularly if you are a Higher Rate or Additional Rate taxpayer. For these latter two groups, the tax relief must be claimed via Self Assessment. The 20% relief available to all taxpayers should be done automatically on your behalf “at source” by your SIPP provider.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
