In my previous post, we discussed in detail what a Stock and Shares ISA Account is. In today’s post, I am going to give you some information about another option where you can boost your long term savings, in order to maximize them when your retirement age comes: Self Invested Personal Pension (SIPP).
Before going through the details, let’s clarify the main difference between a “normal” private pension, and a SIPP: Personal pensions are managed by a pension fund manager who will select the investments (usually this will be an old/current employer, or an insurance company), while a Self Invested Personal Pension (SIPP) will give you control and more choices over how and where you place your investments. Furthermore, a SIPP is a type of personal pension scheme that is registered with HM Revenue and Customs in the UK.
Also, I am excited to let you know that I am building up a Glossary of all the terms that might be useful on this journey, regardless of your knowledge of these financial topics that we are discussing. As I have always thought that the retirement pension is something very important, I am adding some basic concepts from this article. You can find them at the end of this post.
After all these definitions, let me share with you a bit of my experience with a SIPP account. As I’ve been working in the UK since 2014, I have accumulated some pension pots from my previous employment. Something that always made me uncomfortable is not having control over the destiny of this money. That’s why a couple of years ago, I decided to open a SIPP account in order to take control of this very important part of my future finances. By doing this, I consolidated the three different pension pots I had from my previous jobs, and I started managing them myself.
As mentioned in my previous post Future Passive Income – ISA account, I’ve been increasing my knowledge about the financial markets for quite a few years now, and as a result, my profitability on both accounts (ISA and SIPP) has finally launched, and I can happily tell you that I am consistently increasing the value of my assets. Again, I keep following the same two strategies mentioned in my previous post:
- Dividend strategy
- Index Fund Investment
If you stick with me, I promise that my following posts will give you lots of details about these two strategies!
So, how do you choose the SIPP provider that is right for you? In the UK you have plenty of options, and there is no single answer to this question, but for me there are some important points to take into account:
- Ensure the provider is regulated by the Financial Conduct Authority in the UK.
- Fees: Trading fees, platform fees, fund custody charges, foreign exchange conversion rate charges…
- Wide range options of investments
- Useful account features
- How user-friendly the App or browser is
As I don’t want to repeat myself, (the same above points have been discussed in my previous post) please have a look at Future Passive Income – ISA account, where you will find more detailed information about the best way to select a provider.
Finally, I can’t end this post without raising the following question: Are SIPPs right for you? Anyone under 75 years old who is a tax resident in the UK can open a SIPP, and there are no age limits for moving other pension pots into one. However, SIPPs are usually most suitable when you have some knowledge about financial markets and you have the time to research and manage your investments. Please do not forget that investments can fall as well as rise. So when you choose to manage a SIPP by yourself, you need to be ready to take responsibility for your decisions if things go wrong. If you are in doubt, my advice would be to speak to a regulated adviser who will be able to tell you whether SIPPs are a good idea for you or not. As always, you can check that the adviser you are talking with is regulated by the Financial Conduct Authority.
Hope this information is useful for you, and please do not hesitate to contact me if you have questions about this very important topic!
Terms added to the Glossary:
State pension: Is a regular payment that you can claim, and you will receive from the government when you reach your State Pension Age. In the UK it is currently 67 years old. How much State Pension you will get depends on your National Insurance contributions history. In the UK, the current State Pension provides up to £179 per week. If you want to have more income than this basic rent, it would make sense to start saving into a Pension Scheme. Finally, if you want to check your State Pension online, you can do it on the official government website.
Workplace pension: Is a pension that is arranged by your employer. Contributions are taken directly from your salary and paid into your pension pot. This pension scheme has two big advantages: Your employer will also add money to your pension, on top of your salary contributions, and the government will also add some contribution in form of tax relief. As soon as you join, you should receive a letter with all the information, and nowadays, you should also receive your credentials to log into the portal, where you can see all the details of the benefit. You might be able to choose between two o three options of where to put your money, usually defined by risk. There are two types of workplace pension: Defined benefit pensions and Defined contribution pensions. You can have a look for yourself at the types of private pensions defined by the government in their oficial website,
Defined benefit pension: Is often called a “Final Salary” Pension; it’s a type of workplace pension where you will get paid at your retirement age. A defined income amount is based on your salary and the number of years you have worked for the employer, rather than the amount of money you have contributed to the pension. Your employer is responsible for making sure there’s enough money in the scheme to pay you when you reach your retirement age. If the company gets into financial issues and can’t afford to meet its pension commitments, the Pension Protection Fund can cover the pension pot. Defined benefit pensions are increasingly rare, but you might have one if you have worked for a large company or a public sector organization.
Defined contribution pension: This kind of pension works saving up a pot of money over may years, to be held in investments until you reach your retirement age. It’s the most common type of pension available nowadays in the UK, and is used both in workplace pensions schemes and also for personal pensions. It’s very important to understand that the amount of money you will get when you retire depends not only on how much you put in the plan over the years, but also on how much this money grows.
Trustee of a Pension Plan: This is a group of people who are responsible for making sure that the Pension Plan is managed only in the best interests of its members and ensuring that the rules of the Pension Plan are always followed. In the majority of the Plans, some of the Trustees have to be nominated by the members. On the other hand, the Trustees are ultimately responsible for running the Pension Plan, and they can also appoint experts such as pension administrators or investment mangers. As Pension Plans are subject to loads of regulations to ensure that the benefits are very well-protected, the Trustees need to demonstrate that they have an appropriate level of understanding of several topics, like the law relating to pensions and trusts, the funding of Pension Plans or the investment of Pension Plan assets.
Pension TAX relief: Whether you are currently contributing to a Pension Plan or whether you are drawing a pension benefit, it is very important to understand how the TAX legislation of Her Majesty’s Revenue and Customs (HMRC) may affect you. In general terms, you will receive tax relief on contributions into a pension Plan because they are paid before income tax is applied to your salary. As an example, if you are a basic rate tax payer at 20%, each £1 contribution into your pension only costs you £0.80 in real terms. Please be aware that only a certain amount of these savings will qualify for tax relief.
Annual Allowance (AA): is the amount of your pension savings that can qualify for tax relief each fiscal year, and in the UK is currently set at £40,000. However, if your total income is above £240,000, including from all sources, not only your salary, you will be subject to a lower AA, reducing to a minimum amounting to £4,000.
Lifetime Allowance (LTA): is an allowance on the total amount of authorised benefits you can receive from your pension Plans. If the total value of your benefits in all of your pension Plans exceeds your available lifetime allowance the excess benefits will be subject to an additional tax charge known as the lifetime allowance tax charge. The LTA is set at £1,073,100 for the 2022/23 tax year.