When it comes to saving for retirement, it can seem like there are endless options to choose between. One you may not have considered is a Self-invested Personal Pension (SIPP).
While you typically sign up to a pension through your employer, a SIPP allows you to take more control over your savings as you plan for retirement. It’s essentially a pension wrapper that holds your investments until you’re ready to start withdrawing a retirement income. While a Workplace Pension is also usually invested, where the money is placed will be decided by the fund or trustees. In contrast, with a SIPP you choose the investments; you may have heard them referred to as DIY pensions for this reason.
As a result, it provides you with more flexibility and choice. However, a SIPP isn’t the right option for everyone. If you’re not comfortable with making investment decisions or weighing up risk profiles, for example, a SIPP is unlikely to be the right fit. If you’re considering using a SIPP, it’s important to take advice first and consider alternative options.
Through a SIPP provider, you’re able to invest in a range of assets to suit your goals and attitudes to risk. Investment options can vary between providers but may include:
- Stocks and shares
- Investment trusts
- Government securities
- Commercial property
- Deposit accounts
With a SIPP, you’ll still be able to access your pension in the same way as you can with a Defined Contribution scheme under Pension Freedoms. This allows you to withdraw your pension flexibly once you reach 55, rising to 57 in 2028, if you choose to do so.
If you don’t benefit from a Workplace Pension, for instance, if you’re self-employed, a SIPP can provide you with a way to build up retirement savings and take advantage of the tax relief offered on pensions.
Before making any financial decisions, weighing up the pros and cons is crucial; it’s no different with a SIPP.
Pros of a SIPP
Increased control: If you have a clear idea about where you want your retirement savings to be invested, the control a SIPP offers can be appealing. With a SIPP, investment choices can be tailored to your exact needs and goals. In contrast, a typical Workplace Pension will offer just a handful of fund options to choose between. If you’re an experienced investor, the standard funds may not be what you’re looking for, a SIPP provides an alternative. Of course, greater control isn’t an advantage for everyone; you need to feel confident in your abilities to manage the investments before proceeding.
Adapt to changes: Markets and pension legislation change frequently, affecting your pension and investment performance. A SIPP can allow you to effectively respond to changes to minimise risks and capitalise on opportunities. Here, it’s important to remember that a pension is a long-term investment. Investments fluctuate and trying to time the market is rarely a wise move. Instead, looking at the bigger picture when you decide to sell or buy is crucial.
Cons of a SIPP
Greater responsibility: As you’d be making the investment decisions relating to a SIPP, you’ll be responsible for how it performs. It can be a daunting task, particularly if investing isn’t an area you’re comfortable with. If you don’t feel confident making investment decisions that could affect your retirement lifestyle, alternatives may be better suited to your situation.
Investment risk: All investments carry some risk. However, there is a chance you place the money in your SIPP in some unsuitable investments, affecting returns and retirement income. If you get an investment decision wrong, it can have a significant impact on the pension benefits you receive. While other pensions are also invested, the key decisions are made by professionals rather than being placed in your hands.
Charges may be higher: Compared to other types of Personal Pension, a SIPP often has higher charges. You may have fees from both the SIPP provider and for the underlying investments, for example. These charges will eat into the contributions and returns generated so it’s important to consider them when calculating the SIPP’s projected performance.
Whether you believe a SIPP is right for you or not, we’re here to offer you help with creating a retirement income. Please get in touch to discuss your pension savings.
Please note: A pension is a long-term investment. The value of investments may fluctuate and can go down, which would have an impact on the level of pension benefits. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.