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Open a SIPP and make your money work harder for your retirement

12 May, 2022

Why should you open a SIPP?

Sponsored by Charles Stanley

FACT: the Government will pay you to put money into a private pension, in the form of tax relief. This is one of the easiest ways to boost your savings and get on track towards a comfortable retirement.

What is a SIPP?

A Self Invested Personal Pension (SIPP) as the name implies, is a personal pension with which you are free to pick and choose your own investments. Far too many people still don’t have one, which we think is nuts, because you can get so much free money (which we’ll explain in detail below).

How does a SIPP work?

Anyone under the age of 75 is eligible to open a SIPP. That's not just adults either; parents or guardians with parental responsibility may open a Junior SIPP for their children. This is uncommon, although we think it's never too early to start saving for a pension! Even if you saved £50 a month from the age of 16, your money would be worth at least £30,000 by the time you’re 66 – the state pension age (and this figure disregards any earnings from stock market growth and compounding interest).

When I can withdraw money from a SIPP for my retirement income?

You can start withdrawing money from your SIPP when you're 55 (57 in 2028). In contrast, the minimum age for taking out your State Pension is 66. This will rise to 67 between 2026 and 2028, and 68 between 2044 and 2046. It may keep rising after that, so watch out!

SIPP tax relief explained

Everyone who puts money into a SIPP can claim at least £20 tax relief per £80 they put in. This can quickly add up over time. £1,000 worth of personal contributions in one year will be topped up by £200 of free government money. £10,000 contributed over 10 years would be topped up with £2,000. You get the picture!

If you’re a higher-rate taxpayer, you can claim an additional £20 per £80 in your tax return or by contacting HMRC directly. Additional-rate taxpayers can claim another £5, or a total of £45 per £80 invested. So don’t forget to claim the money you’re entitled to! Too many people don't.

Here's another way of looking at it: if you're a higher rate taxpayer, to get £100 in your SIPP, the real cost to you is just £60. That’s because the government has automatically paid you a 25% bonus of £20, and compensated you with another £20 after you've claimed the extra tax relief. That’s a whopping 66.7% government bonus on whatever you contribute towards your private pension Sounds too good to be true? No!

SIPPs - the fine print

When you start taking an income from your pension (drawdown), 75% of your savings (including any savings earned in your workplace pensions) will be taxable, while 25% will be tax free. However, the tax relief you earn during the accumulation (saving) phase will give your pension pot a significant boost. And don't forget about the effect of compounding, which is the interest your pension pot will accumulate over a long period of time.

Don't even think about taking money out of your SIPP before 55 (or 57 in 2028). HMRC will charge you an early withdrawal fee and hit you with a 55% tax rate if you do.

But do you really need a SIPP if you already have a workplace pension?

Normally, yes, because a workplace pension alone is unlikely to generate enough savings to support a comfortable retirement. Although the minimum contribution is now 5% for employees and 3% for employers (for Salary Sacrifice schemes), a combined contribution of 8% leaves the average person on a £30k salary with just £2,400 worth of contributions each year*.

*This figure excludes tax relief, which will vary depending on which income tax bracket applies to you.

Okay, so if I'm opening a SIPP, what are my options?

1 - You can do everything yourself

You can choose a platform SIPP in which you pick all your funds and shares.

  • Make sure you know what you’re doing!

  • Keep a close eye on your investments. You may need to move things around (rebalance) from time to time).

  • If markets don’t move in the right direction, no one is going to jump in and save you.

2 - You can choose a ready-made portfolio

You’ll answer a series of short questions before being allocated a portfolio based on how much risk you’re comfortable with.

  • Low-risk – most of your SIPP will be held in low-risk assets like cash and bonds.

  • Medium-risk – roughly 40 to 60% of your SIPP will be held in stock and shares.

  • High-risk – most (usually at least 80%) of your SIPP will be held in stocks and shares.

Many providers also offer ethical options (sometimes referred to as ‘responsible' portfolios) which aim to put more of your money to good causes, like improving access to education or avoiding sectors such as tobacco.

3 - You can pay a financial adviser to do all the hard work for you.

They can pick your investments and move things around when markets change. They can also offer you personalised financial advice to help you reach your goal and understand what you need to do to get there.

How many people have a SIPP to fund their private pension in the UK?

According to Which?, around two million SIPPs were owned in 2020, representing a collective value of about £180 billion. This still only represents a tiny fraction of the total number of UK residents who are eligible for a SIPP. For the record, that's every UK resident under the age of 75.

How much money should you put in your SIPP each year?

That is up to you. With some providers, you can open a SIPP without having to put any money in at first. But when you're ready to start contributing, you may need to pay a minimum amount (i.e. £500). You can put up to £40,000 in a SIPP each year, which is twice as much as the tax-free allowance for ISAs. However, unlike ISAs, when you take an income from your SIPP, 75% of your savings will be taxable.

How much do SIPPs cost?

There’s no quick and easy answer to this, because costs vary depending on whether you choose a platform, a ready-made portfolio, or a financial adviser.

The median administration fee for a platform is just under 0.4% if you have £10k in your account, but this reduces to just under 0.3% if you have £100k in your account.

How many SIPPs can you have for your private pension?

Technically, there is no limit on how many SIPPs you can have and contribute to during each tax year. This differs from ISAs, as you can only contribute to one of each type in each tax year.

SIPPs - in summary

Figure out how much you might need for retirement

Check out Charles Stanley's Pension Contribution Calculator to determine whether you will have enough money for the retirement you want.

Commonly asked questions about private pensions and SIPPs

How should I invest when I want to retire in less than 10 years?

Do I need a financial adviser to switch pensions funds?

I've consolidated two pensions into a SIPP and now find I could be looking at exceeding the lifetime allowance. What should I do?

Have another burning question? Ask away!