Using a SIPP to save for retirement
A SIPP is a self-invested personal pension which is set up by an insurance company or specialist SIPP provider. It is attractive to those who wish to manage their own investments. Contribution to a SIPP may be made by both the individual and, where appropriate, by the individual’s employer.
Investments
The range of potential investment is greater for a SIPP than for a personal pension or group personal pension scheme.
The SIPP can invest in a wide range of assets, including:
• quoted and unquoted shares;
• unlisted shares;
• collective investment schemes (OEICs and unit trusts);
• investment trusts;
• property and land (but excluding residential property); and
• insurance funds.
A SIPP can also borrow money to purchase investments. For example, a SIPP could take out a mortgage to fund the purchase a commercial property, which could be rented out. The rental income would be paid into the SIPP and this could be used to pay the mortgage and other costs associated with the property.
Making contributions
Tax-relieved contributions can be made to the SIPP up to the normal limits set by the annual allowance. This is set at £40,000 for 2019/20. The annual allowance is reduced by £1 for every £2 where adjusted net income exceeds £150,000 and where threshold income exceeds £110,000 until the minimum level of £10,000 is reached. Anyone with adjusted net income of £210,000 and above and threshold income of at least £110,000 will only receive the minimum annual allowance of £10,000. Where the annual allowance is unused, it can be carried forward for three years. Any contributions made by the employer also count towards the annual allowance.
SIPPs operate on a relief at source basis, meaning that the individual makes contributions from net pay. The SIPP provider claims back basic rate relief, with any higher or additional rate relief being claimed through the self-assessment return.
Drawing a pension
A SIPP is a money purchase scheme and the value of benefits available to provide a pension depend on contributions that have been made to the scheme, investment growth (or reduction) and charges.
It is possible to draw retirement benefits at age 55. A tax-free lump sum can be taken to the value of 25% of the accumulated funds. Withdrawals in excess of this are taxed at the individual’s marginal rate of tax.
To prevent recycling contributions, where pension benefits have been flexibly accessed, a reduced money purchase annual allowance, set at £4,000 for 2019/20, applies.
Further queries…
For more information on SIPPs and the full range of services we offer, see www.arthurboyd.co.uk/accountancy/ or contact us directly on 028 9032 9255 or by email info@arthurboyd.co.uk.
FAQs
Your main options are:
- Keep your pension savings where they are – and take them later.
- Use your pension pot to buy a guaranteed income for life, also known as a lifetime annuity. ...
- Use your pension pot to give you a flexible retirement income. ...
- Take a number of lump sums. ...
- Take your pension pot in one go.
If investment returns are poor and a high level of income is taken, this will result in your SIPP falling in value. This could result in a lower income than anticipated in the future. If your SIPP runs out of funds it could leave you relying on other sources of income for the rest of your retirement.
ISA SIPP a good idea? ›
You can choose to take a flexible income as and when you need it. Or you can opt for a secure income for the rest of your life if, for example, you don't want to keep your pension invested in retirement. If you're looking to take control of your retirement savings, a SIPP is an excellent option.
How much can I pay into a SIPP if I am retired? ›
If you aren't working, you can contribute up to £3,600 a year, equating to £2,880 from you and £720 in tax relief. If you are working, and your employer wants to contribute to your SIPP, they can, either by cheque, direct debit or BACS.
What is the SIPP process? ›
You can approach a SIPP provider directly and they will steer you through the process. However, a more prudent approach is to go through your financial adviser. An IFA can help you choose the best provider for your needs and work with you to create an investment strategy and portfolio.
How do I withdraw money from my pension fund? ›
Once you've reached the retirement age for your pension, you have 4 ways to access your savings:
- withdrawing your full pension pot.
- withdrawing from your pot in smaller lump sums.
- flexible drawdown.
- an annuity.
In short, SIPPs (Self-Invested Personal Pensions) are generally safe. They are regulated by the FCA, and you're protected by the FSCS compensation scheme. However, their safety does also depend on the underlying investments you choose in your SIPP.
Why is my SIPP losing money? ›
Political and economic uncertainty, disease as well as conflict, affect financial markets and cause them to rise or fall. But markets do recover after a fall and because your pension is a long-term investment, any dips are likely to be short-lived.
Is my pension safe in a SIPP? ›
Holding pension funds in a SIPP can offer a wealth of flexibility, but as it's not your typical pension you may be wondering how safe your money is. The good news is that SIPPs are protected, though the extent of this varies according to the investments you hold.
Can you cash out a SIPP? ›
It's not illegal to withdraw from a SIPP early. However, because it's a retirement product, the current withdrawal rules and penalty structure means that it's likely not in your financial best interest to begin taking money out of a SIPP before 55 (or 57 when the withdrawal age goes up).
Firstly, as SIPPs are held in the UK, the investments and payments have to be in £GBP. This means that if you plan to draw an income from your SIPP while you live abroad you will be liable to currency fluctuations, so you may wish to factor this is into your retirement planning.
What is the difference between a pension and a SIPP? ›
What is the difference between a SIPP and a personal pension? SIPPs work in very similar ways to a personal pension however they are more flexible and offer you more control over investment. This means a SIPP is a great option for those who want to self-manage their pension.
What are the drawdown options for SIPP pension? ›
Drawdown options
- Leave the whole SIPP invested until you need access to it.
- Take a 25% tax-free lump sum and leave the remaining 75% invested to use as you need.
- Use the remaining 75% to pay yourself a regular income on a schedule that suits you (e.g. monthly).
