With recent changes to the pension market and £18bn contributed to schemes in the last financial year, saving for retirement is a growing area offering exciting new options for investors.
HMRC estimates that around 5 million people* are contributing to personal pensions, with an average yearly investment of £3,500.
There are many different ways to save for your retirement and contribute to your pension pot. One method which has grown in popularity since the government introduced their “pension freedom reforms” in April of this year is a self-invested pension plan (SIPP).
Now over-55s with defined contribution (DC) or ‘money purchase’ pensions will be able to access their entire fund as cash, or, put it into ‘drawdown’ and take an income without being encumbered by any limits on withdrawals. Ben Gaukrodger, Savings Policy Manager for the Association of British Insurers (ABI), says: “Many people are accessing the pension freedoms successfully, with more than £1.8 billion withdrawn in the first two months.”
What is a SIPP?
A SIPP is a wrapper that goes around your pension investments. It allows you to benefit from tax breaks e.g. taking a tax-free lump sum of up to 25 per cent of your pension pot after the age of 55-years old.
The SIPP celebrated its 25th birthday on 19 March and since its launch in 1990, it has allowed investors to take control of financial decision making rather than leaving it in the hands of insurance companies and fund managers.
So how can you invest in a SIPP?
Individuals can invest in a SIPP via numerous DIY investing platforms. AJ Bell YouInvest lets individuals pay in up to £40,000 a year including tax relief, with low cost dealing charges, no set up charges and no transfer charges (if you are moving an existing pension to AJ Bell).
What are the benefits of investing in a SIPP?
There are a number of ‘pros’ with investing in a SIPP. For example, investors can choose what shares, funds (OEICs and unit trusts), government bonds, corporate bonds, exchange traded funds (ETFs), exchange traded commodities (ETCs) to invest in. That means you can adopt a “hands on” approach to managing your portfolio of investments. Tax relief is another benefit, with investors able to reclaim income tax on contributions. The annual allowance for contributions in 2015/2016 is £40,000. For higher rate taxpayers on a tax rate of 40 per cent or even 45 per cent, the reclaim is very beneficial. As well as paying personal contributions into your SIPP yourself, contributions can be paid by another person on your behalf e.g. your spouse, parent, grandparent and if you are employed, your employer.
Is a SIPP the right option for me?
Investing your retirement savings in a SIPP may not be for everyone, however. If you are uncertain as to what type of investment to invest in e.g. shares, ETFs or government bonds (for the maximum return) then you might be better off seeking advice from a financial adviser or a fund manager – fees would be applied for this sort of advice.
Jackie Spencer, pensions expert for the Money Advice Service, says that while SIPPs offer greater flexibility than traditional pension schemes, they often have higher charges and the time involved in research means they may be more suitable for experienced investors.
You also need to remember that your money is tied up for a long period and you might be better off having a company pension with contributions made by your employer. Whatever you do, it is important to do your homework as there are many different types of SIPPs each offering different investment options.
Please note the value of investments, and any income from them can go down as well as up and you may not get back your original investment. AJ Bell Youinvest do not offer advice about the suitability of their products or any investments held within them. Should you require financial advice you should consult a suitably qualified financial adviser. Tax rules can change in the future and the tax treatment depends on your personal circumstances. Past performance is not a guide to future performance and some investments need to be held for the long term.
AJ Bell is authorised and regulated by the Financial Conduct Authority. The Independent is not responsible for the content of this advertisement feature and any queries should be directed to AJ Bell.