Saving for a prosperous old age, and building up a pension pot is a priority for most of us. There are a number of ways to do it, each with their own advantages and disadvantages, and getting the right solution for your needs can make a big difference to the size of the pot you eventually retire with.
Aside from the state pension there are two different types of pension. A workplace pension, and a private pension. The workplace pension relies on your employer, but with many of us changing employers in the course of our careers, most of us should have a private pension. With a private pension you are responsible for making the payments, while your pension provider will take care of the details, and most importantly, invest the money you contribute on your behalf.
Your money is grouped with that of other pension savers, and the investment is handled by professionals, who will aim to ensure that your money is able to grow steadily, with a risk profile they feel is appropriate to your age. The nearer you are to retirement, the more cautious the investment tends to be.
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An option within the personal pension market maybe a Self Invested Personal Pension (SIPP)
What is a SIPP?
SIPPs, and the factors that might make you consider them.
SIPPs are self-invested personal pension schemes. This means that they take the investment responsibility away from the pension fund managers, and leave it in your hands. Some traditional personal pensions may provide you with some investment choice, but limit it to a shortlist of funds usually run by the pension company’s own fund managers.
With a SIPP you can invest almost anywhere you like and choose your own investments providing these are approved by HMRC.
SIPPs are not for the inexperienced. In fact, they are for people who understand investing, are prepared to do the necessary research and planning, and happy to spend some time managing their retirement savings. You must feel comfortable managing your own investment portfolio and picking your own investments, because if you make the wrong investment choices, you’ve only got yourself to blame.
How do SIPPs work in practice?
Just like an ISA is a wrapper for investments which keeps them safe from the taxman, a SIPP acts as a wrapper for your pension investments. You can put lots of different types of investments inside your SIPP wrapper.
Whatever you choose, you will have the advantages of the usual pension tax efficiency that applies to other pensions.
You can manage your SIPP online, buying and selling investments with the click of a button and keeping an eye on how they’re doing online. You invest monthly or with a lump sum, and start from scratch with money that hasn’t been held in a pension, or move it from an existing pension scheme.
With conventional pension schemes the cost of paying fund managers will eat into your savings. SIPPs can help avoid these costs.
Of the 4 types of SIPP, there are actually two main types.
A Low-cost SIPP keeps the costs to the absolute minimum, because you’re in control of them and all the decision-making.
These are typically an ‘execution only’ option which means you make the investment decisions, which are carried out for you. Some providers will let you start a low-cost SIPP with a sum as small as £5,000, but you may wish to consider transferring an existing pension fund or you may be able to contribute several thousand pounds a year, within current HMRC contribution limits
A full SIPP usually provides access to a team who can help make decisions on what investments to hold in your SIPP and help administer more complex investments such as commercial property. But they typically come with higher charges.
With a Full SIPP, you will receive advice to support your investment decisions. This type of SIPP typically means higher charges.
What can you invest in?
One of the great appeals of a SIPP is the fact that you can invest in a wider range of assets than conventional pensions schemes. Gilts and corporate bonds can be joined by investment trusts, Unit trusts, Open Ended Investment Companies or OEICS – and even commercial property.
If you are new to investment, it may be prudent to buy share-based funds rather than individual shares or more radical investments – but the choice is yours.
With the markets still reeling from the effects of coronavirus, it could be time to look very carefully at the potential for investment with a SIPP. Some sectors may never recover from the falls they have sustained – while others will actually be boosted as a result.
If your pension plans have been disrupted, and you are looking at ways to recover lost ground, you must get expert advice. Call us for the help you need.
The potential for recovery could be an opportunity to get a head start on your SIPP, but it will certainly require expert help. At Continuum we can discuss the potential of this type of pension, whether it is right for you and your plans – and help you find the providers with the balance of charges and service that you need.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement or investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of property investments and income from them can go down as well as up and investors may not get back the amount originally invested.
As property is a specialist sector it can be volatile in adverse market conditions, there could be delays in realising the investment.
Property valuation is a matter of judgement by an independent Valuer therefore it is generally a matter of opinion rather than fact.
When investing your capital is at risk.
A pension is a long term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
The Financial Conduct Authority does not regulate taxation advice and some aspects of commercial property investment.