SIPP is just an off-putting name for a sort of DIY pension which you manage yourself, typically online. It stands for ‘self-invested personal pension.’ As the name suggests, SIPPs were really invented for all those people who were fed up of their pensions disappearing into an information black hole which spewed out an unintelligible 25-page snail mail report at you once a year.
To understand SIPPs, you have to get rid of this idea that a pension is a complete thing in its own right. A pension is just a container with its own set of tax rules and access rules about the money inside it. What actually goes into this container is not necessarily an opaque decision which you hand off to a distant ‘propeller head’. Every time you put some cash into the SIPP, you then decide what investments to buy with your cash, and therefore you control how your retirement savings are deployed.
As a quick reminder on the “why would I bother with a SIPP” question, it’s the bribe of free money from the Government who need to incentivise you to save so they lessen the pain of millions of broke 100 year olds to sort out. Basic rate taxpayers get £20 for every £80 put in. Higher rate taxpayers can claim a further £20 back on their tax returns.
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How much can I pay into a Pension?
The maximum amount you can pay into your pension scheme in a tax year, assuming you are earning more than £3,600 per annum, is 100% of your earnings. But for tax relief purposes, the current annual allowance for most people is £40,000, so you can’t go beyond this. This is what is known as a first world problem, along with Waitrose running out of avocados.
If you get your hands on a lump sum of money – inheritance, sell a business, get a whacking bonus – then you can use previous years’ allowances and contribute more, so read up on that.
The rules for higher earners are more complex. Anyone whose total income is over £150,000 a year will get a reduced annual allowance. For every £2 earned above £150,000, the allowance tapers down by £1, resulting in anyone earning over £210,000 receiving an annual limit of £10,000 in tax relief.
Higher earners take note – the lifetime allowance is currently £1,030,000 (rising to £1,055,000 from April 2019). This means there is no point in saving more than this into a pension before you retire or you get taxed to the max.
Although this lifetime limit sounds like loads, if you start saving early and your investments do well, it could impact you. Middle managers in the public sector, for example, are not immune! A senior teacher? High up the healthcare career ladder? Worth thinking about whether this will impact you.
If you’re 40 now and saving into stocks and shares in your pension, don’t forget to factor in stock market growth! For example, £350,000 over 20 years with an average return of 5% will get you to the million pound mark.
At the lower end of the earnings spectrum, don’t be put off by these high numbers. You can also start a pension with a direct debit for a relatively small amount such as £50 a month – sometimes less. It really is worth starting as early as you can – even if you think that your tiny little dribbles won’t make much difference.
How much should I pay for a pension these days
There are three basic elements to the charging structure:
- Admin fees – annual administration fee for providing the pension - this will usually be between 0.35% and 0.5% each year and will be levied by the company you open up the account with.
- Dealing charges – fees charged when you buy or sell funds or shares. It’s normally about a tenner to buy a share and buying funds is usually less or free.
- Fund manager fees – an annual charge from the fund manager for managing your investments. This will apply if you buy managed funds inside your pension which is the typical structure. This is usually about 0.75% every year.
Most people wonder why it can’t just be bundled together as a single and simple fee but the regulator has been clear that it wants people to know what they are paying for what parts of the overall service. Much like the Ryanair model where you pay to have a sandwich and a pee!
All in, I don’t think any of us should be paying more than about 1.3% a year. So £13 on every £1,000 invested. The biggest variable will be the investment charges and these will vary from lower-cost ‘passive’ funds to higher cost ‘active’ funds. If you’re in what is called a ‘passive’ solution then you should be paying less than 1% all-in.
What can I put into my SIPP?
You are allowed to put some cash, shares, investment funds and other assets into your SIPP. The whole concept is to deliver choice. You can’t put residential property in there – like a holiday house – but you can sometimes include commercial property. At that point it all gets horribly complicated and you’ll need a good financial adviser.
Most of us will be happy to choose a decent range of funds. It depends on how much money you have in here, but as a rule of thumb between 8 to 12 investment funds should be enough. Enough to spread the risk around different sectors, regions and asset types – but not so many as to completely dilute the decisions or value a fund manager is adding.
Confident savers may prefer to choose their own range of individual shares but we wouldn’t suggest this path for the newer investor.
If you don’t want to research a pool of funds and you aren’t sure what to do, look at using a single multi-asset fund. This is a great way to start for the less confident who are starting to save small(ish) and regular amounts into a SIPP.