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The road to a perfect pension

Sipps offer many benefits, but don't open one unless it is right for you
February 7, 2019

Saving for retirement is one of your greatest financial priorities, especially as life expectancy is growing and retirements are likely to last longer.

The first port of call is a workplace pension into which your employer pays in too – if you are offered one. But if you want to build up retirement money over and above your workplace scheme or are self-employed and don’t have a workplace scheme, a Sipp – self-invested personal pension – is one way to save for retirement tax efficiently. Another option is a defined-contribution personal pension.

When you contribute to a pension you get government tax relief of 20 per cent if you are under age 75, and your contribution is within your annual and lifetime limits. Higher-rate taxpayers who pay income tax of 40 per cent on their top earnings can claim a further 20 per cent tax relief via their tax return or local tax office. And additional-rate taxpayers who pay 45 per cent on their top earnings can claim back a further 25 per cent.

So, for example, a £10,000 contribution would only cost £8,000 for a basic-rate taxpayer, as little as £6,000 for a higher-rate taxpayer and £5,500 for an additional-rate taxpayer.

If over your career you have accumulated several workplace pensions to which you and your employers no longer contribute, it could be a good idea to consolidate them into one pension.

But before opting for a pension, consider when you will need to access the money. Can you wait until age 55, or from 2028 age 57, to access it? If you might need it sooner, a pension may not be appropriate for you – an individual savings account (Isa) might be better. Although you can get tax breaks when you put money into pensions – when you withdraw it you can take 25 per cent of their value tax-free, but anything above that is subject to your highest marginal rate of tax.

That said, your income may be less in retirement than when you were at work, so you could be, for example, a basic-rate taxpayer. But this still means income tax of 20 per cent in England, Wales and Northern Ireland on anything you get above your annual personal allowance, which is currently £11,850.

When you draw from an Isa, by contrast, you do not incur any tax at all, which is particularly useful if you are a higher-rate taxpayer in retirement. This could be the case, for example, if you get payouts from a generous workplace scheme. But with most kinds of Isas you do not get any government tax relief on your contributions.

Some investors have multiple financial needs and goals, in which case it could be a good idea to save into a variety of different tax-efficient wrappers, says Danny Cox, chartered financial planner at Hargreaves Lansdown – if you have enough money to do this.

If you decide a pension is the best type of wrapper for your retirement savings, then you need to decide what type of pension is best. If you want to manage your own investments and choose from a wide range, a Sipp is a good option. But also consider if you can put time and effort into managing it. Do you have enough time on top of your job, family and other commitments to research and monitor investments? It is very important to get your investment strategy right or your assets might not be able to provide you with the income you need through retirement. 

You don’t have to hold a lot of funds in a Sipp – for example, you could hold one global tracker fund or one multi asset fund. And then as your Sipp grows you could diversify it at a later date.

If you opt for a Sipp you need to decide which type to go for, as different providers have different charges and offer different investment options. If you want one that gives you access to a very wide range of investments including funds, listed securities such as shares, government securities and commercial property then you need a ‘full-service’ Sipp. But the charges for this will be higher.

If you just want to invest in funds and maybe some listed securities, there is no point in paying higher charges for a full-service Sipp. Low-cost Sipps, such as those offered by investment platforms, usually offer access to a wide choice of funds, and sometimes also listed securities such as shares, exchange traded funds (ETFs) and investment trusts.

 

Find out more about Sipps with our special guide:

How to manage your Sipp

Choosing your provider

Keeping an eye on risk

Countdown to retirement