The days of relying on the state to provide us with a comfortable standard of living in retirement are long-gone. The combination of a rise in the number of retired people and a fall in the number of working age people means that the state can no longer to keep us all happy in retirement. And the situation is only going to worsen in the forseeable future.
So the onus has fallen onto all of us, as individuals, to ensure that we have provided for a comfortable future. This is usually a two stage process. The first involves building up a pot of retirement money while we work. The second usually (but not always) involves using the pot of money to buy an annuity – the industry jargon for a regular income for life.
The traditional way to build up your own pension pot has been through a personal pension. These schemes are run by life assurance or fund management companies, who allow you to select from a range of funds. Contributions into the scheme are tax free, so it’s a tax efficient way to save.
Self Invested Personal Pensions (SIPPs)
Self Invested Personal Pensions (or SIPPs) are the new kid on the block in the pensions world. Like traditional pensions, they are schemes that allow you to save a pot of cash for retirement. And, like traditional pension schemes, contributions into them are tax free.
But that is where the similarity ends. In a SIPP, you have a much wider choice of where to invest your money. You can buy shares directly, select from the full range of investment funds available and, in some cases, even put property into your SIPP.
At the end of the savings process comes the pay off – the annuity (or regular income for life). But the options available to you are almost endless and constantly changing, and making the wrong decision can affect you for life.
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