Self-Invested Personal Pension (SIPP)
A tax-efficient way to save for retirement.
4 minute read
What you need to know if you are starting to save towards retirement.
Who's it for? All investors
The value of investments can fall as well as rise and you could get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.
If you’re a long way from retirement, pensions may well be near the bottom of your to-do list.
After all, you’re likely to have a pile of other things to prioritise, not least paying your rent or mortgage, and covering day-to-day living expenses.
Nearly one in five people (17%) aren’t saving at all for later life, according to Scottish Widows’ latest retirement report, and could potentially face a big financial shock when they stop work. The same report found that around 8m people, equivalent to 22% of the UK population expect they’ll never be able to afford to retire.1
The sooner you start paying into a pension, the greater the chance you’ll be able to save enough to achieve the standard of living you’re hoping for when you retire.
The good news is that if you’re employed, aged between 22 and State Pension age, and earn at least £10,000 a year, by law your employer must auto-enrol you into a company pension scheme.
If you don’t meet the eligibility criteria for auto-enrolment, but you earn over £6,136 a year and are aged over 16, you can still opt in to your company scheme if you want to. This means that a percentage of your salary will go into a pension each month, which is supplemented by your employer and the taxman paying into your pot, bumping up your total pension contributions.
Workplace pension schemes are most commonly used, which are known as ‘defined contribution’, plans, where the fortunes of your pension funds are linked to the investment performance of the funds you are invested in.
There’s a minimum total amount that you must pay in. In the 2019-20 tax year, you must contribute 4% and your employer 3%, with the tax man adding a further 1%, bringing the minimum total contribution to 8%. This makes it a 50:50 scheme, with you contributing half and your employer and the taxman the other half. You may find your employer makes more generous contributions, which will further boost the amount you end up with at retirement.
The automatic pension contribution applies to anything you earn over £6,136, up to a limit of £50,000 in the current tax year - this slice of your earnings is known as “qualifying earnings”. For example, if you were earning £24,000 a year, your contribution would be 5% of £17,864 (the difference between £6,136 and £24,000).
If you wish to, and can afford it, you can pay more into the pension than the 4% minimum. This additional sum can also be adjusted, stopped and started as suits you. Some employers will match any additional contributions you pay in up to a certain threshold, so it’s worth checking if yours will.
You’ll get tax relief on any pension contributions at your personal tax rate, so the more you pay in, the more you’ll get as a boost from the government.
You receive tax relief at the basic rate of 20%, so the taxman tops up every £80 you pay in to £100. This is how your 4% auto-enrol contribution get supplemented by 1% from the tax man. If you’re a higher or additional rate taxpayer, you can claim back up to an extra 20% or 25% on top of this via your self-assessment tax return.
The benefit of tax relief depends on your personal circumstances, and tax rules could change in the future. Similarly, the rules governing pension schemes might change in future too.
If you haven’t been auto enrolled into a company pension scheme, perhaps because you’re self-employed, on a career break, or are caring for family members, you can set up a personal pension. This also applies to members of company schemes who do not wish to pay additional contributions to their workplace scheme.
There are three main types of personal pension: stakeholder pensions, standard personal pensions and self-invested personal pensions (SIPPs). The right one for you depends on how much you have to pay in, the range of investments you want access, the costs and how much control you want to have over the underlying investments.
The aim of saving into a pension is that it will provide you with enough income in retirement to live comfortably, but this will depend on how much you save, the performance of your investments, and any charges. If you can, you need to start saving sooner rather than later, as the longer you leave it the less time you’ll have to build up your retirement savings. Find out more about how much you should be considering saving for retirement.
As with any investment, the value of your pension fund could fall as well as rise over time. However, the hope is that, over the long-term, saving into a pension, with the benefit of tax relief, will far outstrip savings in cash accounts though this, of course cannot be guaranteed.
You must also bear in mind that you won’t normally be able to gain access to your pension fund until you are at least 55, potentially rising to 57 from 2028 and this may be increased again in future. You therefore need to consider carefully whether you can afford to tie this money up for the long term, even if your circumstances change. If you’re not sure, seek independent advice. We don’t offer personal investment or pensions advice.
The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.
A tax-efficient way to save for retirement.
You’ve worked hard for your retirement, but before you can start enjoying it, you’ll need to decide how your pension will provide the income you need to live on.
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