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Despite the recent State Pension increase and years of contributions into your workplace pension, you likely won’t receive enough money after retirement to really enjoy your golden years. This is where a Self-Invested Personal Pension (SIPP) comes into play.
A SIPP, which anyone under 75 can open, works similarly to a standard personal pension, as you can make your own contributions. However, you have more control and flexibility when choosing the investments that could boost your retirement pot.
This article will explore four benefits of investing in a SIPP and how much you can put into it to prepare for retirement.
Self-Invested Personal Pensions can offer many advantages for savers, and the leading perks of this strategy include:
A SIPP offers more control and flexibility than other pensions, such as your workplace pension and standard personal pension. By being able to choose the exact amount you want to contribute and how often you do it, you are in complete control of how much you add to your retirement pot over the years.
In addition, you get complete control of which investments to make, how often you make them, and how much you risk. SIPPs give you a flexible range of investment choices, such as shares, bonds, and property.
Most employed workers will have a workplace pension boosted by employer contributions.
However, freelancers, self-employed people, business owners, and others may not. While a SIPP won’t offer you employer contributions, you can still benefit from Government contributions in the form of tax relief.
The government tops up your pension pot with an extra 20% every time you contribute. For example, if you pay £100 into your SIPP, the 20% tax relief will turn your contribution into £120.
Your SIPP provider will claim the tax relief for you, so it is done automatically. Receiving the tax reclaim from HMRC usually takes 6 to 11 weeks.
In addition, higher-rate taxpayers (anyone earning over £50,270 annually) and additional-rate taxpayers (anyone earning over £125,140 annually) receive the same 20% tax relief plus an extra 20% and 25%, respectively, by completing their self-assessment tax returns.
However, it’s important to note that after you turn 75, you’ll no longer receive tax relief on your SIPP contributions.
On the subject of SIPPs being tax-efficient, investment growth is also tax-free, so you can avoid paying income tax, dividend tax, or capital gains tax. This means you get to keep more of your profits for retirement.
While you’re likely thinking about your golden years and not your death, it is essential to know what will happen with the money left in your SIPP when you die.
Luckily, you can decide who will inherit the money in your SIPP, whether a family member, friend, or charity. You are also able to split your pot between various beneficiaries.
If you die before you turn 75, your beneficiaries will benefit from tax-free withdrawals from your SIPP if they are made within two years of your death. However, if money is withdrawn after two years or you die after 75, the people receiving your SIPP will pay income tax.
You can put as much as you want in your SIPP each tax year, but the amount you’ll get tax relief on is limited to £60,000 or 100% of your annual earnings - whichever is lower.
For example, if you earn £25,000 a year but put £30,000 into your pension pot because you’ve come into some money, you’ll only get tax relief on £25,000. However, some pension providers may limit the amount you can put into your pension pot to 100% of your earnings, so this isn’t always possible.
It’s important to note that there is no limit on how many SIPPs you can have. However, you will likely have to open your accounts with different providers.
In addition, you can have both a SIPP and a workplace pension. Having both means you will benefit from employer contributions and the government’s 25% top-up.
If you want more money to enjoy your life after retirement, then a SIPP could be a safe option. However, the type of SIPP you set up depends on you as a person.
Do-it-yourself SIPPs are for those who understand investing, are prepared to research, and are happy to spend time managing retirement savings. An alternative option is a managed online service like Wealthify, which selects and manages investments for you. The latter is an excellent choice for those with little investment knowledge or not much spare time.
