What is a SIPP and How is It Different from Traditional Pension Contributions?

If you’re seeking more control and flexibility over your retirement savings, a Self-Invested Personal Pension (SIPP) offers a tax-efficient option that puts you firmly in charge of your pot. 

In recent years, SIPPs have become increasingly popular. In 2023, more than £205 billion in assets were held in self-invested pensions, with over 1.7 million people using this investment strategy ahead of their retirement. 

But what exactly is a SIPP? How do they work? And in what ways do they differ from traditional pension contributions? Let’s take a deeper look into the growing world of Self-Invested Personal Pensions to explore why their appeal is growing at an exponential rate: 

What Is a SIPP?

Much like a traditional pension, you pay into a Self-Invested Personal Pension, which can subsequently be built through a variety of investments, including shares, bonds, and property. 

You pay your own money into a SIPP, and the two key benefits of this strategy are that you don’t have to pay capital gains or income tax on your investments as they appreciate, and you can also get an instant government tax relief top-up of 25% on your contributions. 

This would mean that paying £200 into your SIPP would see the government add £50, turning your investment total into £250, for example. 

Additionally, a SIPP can help you gain more control over how much you pay. It’s for this reason that self-employed individuals, in particular, can benefit from making personal contributions in a way that helps maintain a level of comfort in their day-to-day lives. 

As well as self-employed workers, SIPPs have become popular among individuals seeking to use personal contributions to build a nest egg for retirement in addition to their workplace pension. 

Should I Consider a SIPP?

The biggest advantage of a SIPP over a traditional pension is the ability to control your investments. 

Using a SIPP offers a greater level of transparency and flexibility over your retirement nest egg. Because you control your pension, you’ll have the freedom to invest in a wide range of options depending on what your provider offers. 

Commonly, you can open a SIPP that focuses on investment types like cash, shares, investment trusts, government securities, corporate bonds, unit trusts, open-ended investment companies (OEICs), exchange-traded funds (ETFs), real estate investment trusts (REITs), and commercial property. 

However, if you intend to open a SIPP to invest in commodities, buy-to-let property, directly-owned residential real estate, loans, luxury assets, or intellectual property, these investments aren’t possible. Should SIPPs fail to accommodate your investment goals, it may be worth looking at alternative investment strategies. 

The flexibility of SIPPs also extends to tax-free withdrawals, where it’s possible to withdraw up to 25% of your pension fund as a lump sum when you reach 55 years of age. However, it’s important to note that the minimum pension age is rising to 57 in the UK from 6 April 2028. 

You should also keep in mind that this added control comes with some extra costs. The cost of hiring your financial adviser and the fees associated with buying and selling shares, for instance, can be unwanted extra expenses for individuals seeking to invest through SIPPs. 

How do SIPPs Compare to Traditional Pensions?

Self-Invested Personal Pensions share many similarities with their traditional counterparts. Both forms of pension provide defined contribution schemes to help build the value of the fund in relation to how much you pay in and the growth of your investments. 

Much like traditional pensions, SIPPs offer tax relief on contributions up to the annual allowance, which is the lower of either £60,000 or 100% of your earnings. 

Both pensions also allow you to take 25% of your earnings tax-free when you reach 55 (or 57 after 2028). It’s also worth noting that both withdrawals are subject to a cap of £268,275. 

Providers of pensions and SIPPs alike can also focus on different areas of investment depending on your financial goals and saving preferences. 

Contrasting SIPPs and Traditional Pensions

Unlike traditional pensions, you’re free to choose and manage your investments with a SIPP, or you can pay an authorised financial adviser to strategise your fund’s growth. 

You’re also free to make changes and additions to your investments as and when you wish, and SIPPs draw great appeal from offering far more investment options than other pension types. 

These broader options mean that you can invest in assets like company shares both domestically and overseas, as well as collective investments, depending on your SIPP provider’s capabilities and restrictions. 

Though there’s nothing stopping you from building your own SIPP from scratch, it’s certainly recommended that you use a regulated financial adviser to choose and manage your SIPP investments on your behalf. This helps to provide a vital layer of protection against things going wrong and you losing your retirement fund. 

Should I Open a SIPP?

There’s no one-size-fits-all answer when it comes to deciding between a SIPP or traditional pension. More often than not, the solution will depend on your circumstances, goals, and risk tolerance. 

If you strongly prefer to manage your investments and crave greater choice in your pension strategy, a SIPP is likely to be the answer you’re looking for. Because of this, self-invested pensions are more likely to be popular among experienced investors and those with knowledge of investment markets. 

You may also want to consider a SIPP if you’re keen to take control of your risk tolerance and add a diverse range of assets to your pension fund to achieve specific or unconventional financial goals. 

However, if you’d prefer to take a more passive approach to building a nest egg for your retirement, a personal pension could be a more suitable solution. 

In the case of a personal pension, a provider will manage your fund on your behalf, helping you to gain peace of mind that your money is well looked after without the risk of feeling overwhelmed by managing your investment. 

Building for the Future

Before you decide between a SIPP and a traditional pension plan, consider your investment goals and risk tolerance. If you have the time and desire to manage your pension in a more comprehensive manner, you may find that a self-invested strategy is most suitable. 

However, it’s always worth researching your options and the capabilities of your providers to get a full understanding of how your pension can be managed. 

Building a sustainable pension plan that works for you can be great for peace of mind in the future. Taking the time to assess your options today is an excellent way of building the best possible nest egg on your terms for the years ahead. 

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