Seven reasons to open a Self-Invested Personal Pension (SIPP) today

The new tax year is now well underway, but while many savers may have decided to park any major pension decisions until later in the financial year – getting ahead early can be a great way to protect your money from the ravages of tax and high inflation.

Pension saving is renowned for being ultra tax efficient thanks to the gift of free cash in the form of tax relief, while investing money over the long-term has the potential to deliver inflation-beating returns thanks to the magic of compounding.

While many people have a workplace pension in place, savers that want to gain more control over their retirement savings can also consider transferring old plans from former employers into a Self-Invested Personal Pension or potentially contributing to a SIPP alongside their workplace pension.

This is a pension wrapper that allows investors to build up a pot of money for their retirement years that comes with a range of benefits - from the ability to choose from a wide range of investments in one convenient place, to flexibility on contributions and drawdown and a simple transfer process.

As Bestinvest unveils a new offer on SIPP transfers*, rewarding new SIPP transfers with £250 in cashback, £500 towards their exit fees from their old provider and up to half price on service fees (T&Cs apply), here Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, outlines seven reasons why opening a SIPP could make financial sense:

A SIPP works in a similar way to a standard personal pension – a type of defined contribution pension where the value of your retirement pot – and the potential income it will generate - depends on how much you contribute, the investment performance of your portfolio and the choices you make at retirement.

While standard personal pensions are typically offered by large pension providers, such as life insurance companies, the difference with a SIPP lies in the words ‘self-invested’.

Effectively you, the saver, have total control over how your money is invested. The beauty of this is that you can choose what investment strategy works for you and decide how much of your pot to dedicate to each type of investment or choose a managed portfolio where a professional does this for you.

SIPP providers, like Bestinvest, typically offer a wider choice of investment options than standard personal pensions, with self-directed investors able to pack their portfolio with a range of assets - from shares and funds to investment trusts and Exchange Traded Funds (ETFs). Many also offer Ready-made Portfolios – off-the-shelf fully-managed investment portfolios - where investment experts do the hard work for you by building a diversified portfolio of investments at a relatively low cost that is tailored to different risk levels.

The great thing about a SIPP is flexibility – making them ideal for freelancers, the self-employed or people that simply want to supplement their pension savings or have one location to transfer multiple pensions into.

DIY investors can make changes to their investment portfolio as often as they want, tweaking their investment strategy at any stage of the saving process. They can also invest when they want to, such as monthly, quarterly, once a year or on an ad hoc basis whenever they have the spare funds.

This flexibility allows the saver to contribute as much as they want to, up to the maximum annual allowance set by the Government of £60,000 - or 100% of earnings for those on lower incomes - across all their pension arrangements. Remember, this £60,000 annual allowance is tapered down for higher earners, reducing by £1 for every £2 of adjusted income (income from all sources, including savings) above £260,000, down to a minimum of £10,000.

The flexibility of a SIPP is also an advantage at retirement, with the investor having the freedom to take an income in a way that suits them, and they don’t even have to retire to access their pension.

Savers can choose to take 25% of their pension as tax-free cash at the age of 55 (57 from 2028), with anything above this amount taxed as regular income at their marginal rate at the time. At retirement, they can consider drawdown, where the pension remains invested while they take an income from it, use their pension pot to buy an annuity which will provide them with a guaranteed income for life, or choose a combination of drawdown and buying an annuity. Finally, savers can also choose to stay invested and continue to add to their pension with tax relief applied to contributions up to the age of 75, though the amount they can invest will depend on whether they’ve already initiated drawdown or not.

Have you ever lost £10,000 in cash or maybe a smaller amount such as £4,000 or a higher sum, such as £15,000. While it might sound inconceivable to mislay such a large amount of money, losing track of a pension is far more commonplace than people realise.

Over 2.8 million pension pots are considered lost, a surge of 75% on 2018 figures, according to October data from the Pensions Policy Institute, with the value of those missing pots estimated at £26.6 billion.

While auto-enrolment, introduced in 2012, ensures more people save for retirement through a workplace pension, that pension does not follow them on to the next job. When you start with a new employer, you will automatically be enrolled into a new scheme each time. When you consider the average worker will have 11 jobs over the course of their career, that’s a lot of paperwork that can get lost along the way, particularly if people move home and forget to notify their pension provider of their new address.

Even those that stayed with their employer for a relatively short period of time may have started making contributions, then stopped paying into the scheme when they left and forgot about it.

In an ideal world, the Government’s heavily delayed Pensions Dashboard – which will give UK savers oversight of their entire pension record, including their state pension - would do the hard work for you. But with the project, initially pencilled in for a 2019 launch, recently pushed back yet again, for now savers who have lost track of their pensions should log onto the Government’s free Pension Tracing Service to find their old plans. They need the names of their former employer or pension provider to answer the questions.

The next step is to consider if it is suitable to gather old workplace pensions into one place, a process known as consolidation. Having retirement savings fragmented across numerous plans means wading through a plethora of statements, multiple login and password details to remember and different fee structures to understand. Scooping all your old pensions together into a single SIPP will give you a clear picture of the state of your pension and whether you have adequate savings to fund your retirement. You will have one password to recall and one place to track your pension savings and ensure they are aligned to your long-term financial goals.

Take note: Before initiating a transfer, make sure you won’t lose any valuable benefits of your existing pension by transferring, such as preferential annuity rates, terminal bonuses or a tax-free cash entitlement which is greater than the usual amount.

Also, assess whether you will incur any penalties when you transfer. Your old pension plan could have exit penalties or reduced benefits if your scheme is a with-profits fund (where you pool your investments).

Transferring an existing workplace pension scheme may also be unwise. Under workplace pension rules, your employer is required to pay at least 3% of your salary into a workplace pension scheme, so unless your workplace is willing to make that contribution wherever your pension is, leave it where it is while you continue to work there.

Also, be wary of transferring final salary pensions or defined benefits schemes. These used to be commonplace but, outside of the public sector, most have closed their doors to new members. These offer a retirement income directly linked to your earnings, rather than the performance of an investment fund and therefore offer much greater certainty. Instead, look at consolidating your other pensions and leave the final salary pension where it is.

Investments in SIPPs attract income tax relief on contributions and then once invested grow free from income tax and capital gains tax – making them the ideal way to reduce your income tax liability at a time when Britons are grappling with the highest tax burden since the Second World War.

The Government gives pension savers, including those that contribute to SIPPs, tax relief on pension contributions up to their annual allowance. This means, any cash invested will be topped up by 20% automatically for basic rate taxpayers, while higher or additional-rate taxpayers can claim back another 20% or 25% respectively through their tax returns. Even non-taxpayers, those not working or children, can benefit from tax relief, though the amount they can contribute to a SIPP is capped at £2,880 with the government topping that up with 20% tax relief giving them a total pension saving of £3,600 per year.

Because some SIPPs are designed for DIY investors, they can come with lower fees, though this depends on which provider you pick so do your homework and compare the charges and benefits of your existing plan against the SIPP provider you plan to transfer to.

High annual charges will only impact the value of your pension so if less of your money is being eroded by heavy account fees, then more is being invested that can benefit from the beauty of compounding over the long term.

When analysing fees, consider the platform service charge - either a flat fee or a percentage of your investments - and any transaction costs to buy and sell shares and funds. You must also consider the annual ongoing costs for any funds you invest in and the exit fee, if there is one, if you plan to move your pension to a different provider.

There can also be ad hoc costs such as income drawdown charges with some providers, so check those too. When you analyse some of your older plans, you may find them pretty expensive, which is why scooping them together into one pot can be more cost-effective.

A SIPP gives DIY investors total control over their pension investments, a motivating factor for novice investors to improve their investment knowledge in a bid to secure better returns. Investment platforms are often typically packed full of handy investment tips, but it can be comforting to have a helping hand along the way with some providers going a step further and offering guidance and advice to ensure savers make smart investment decisions aligned to their risk profile. Remember, investments carry risk, and you may get back less than invested.

Bestinvest, for example, offers free investment coaching with a qualified financial planner, whether you are a client or not, with the 45-minute sessions bookable online. While the coaching sessions can help investors set clear financial goals and consider where to invest to achieve those targets, those needing more personalised investment recommendations can also book a bite-sized investment advice package. Our bite-sized advice packages include an ‘Investing for Your Goals’ session for £295 with a financial planner to set goals and establish how much risk to take or a ‘Portfolio Health Check’ for £495 with an investment professional that analyses a full investment portfolio and offers tailored advice on what actions to take.

Most DIY investment providers offer a free app, making it quick and effortless to monitor their SIPP and buy and sell assets on the go. The apps are typically more intuitive and easier to use than workplace pension platforms, that can often be more clunky.

Some platforms also offer smart digital tools to help clients monitor the value and performance of their investments, group accounts together, tap into guides to power their investment decisions or set and plan financial goals. Bestinvest also offers portfolio projection and simulation tools to help customers design a life plan. This involves setting a goal, such as ‘Retirement’ or ‘Grow my Money’, measuring progress towards that goal and identifying actions to achieve it faster, such as setting up monthly investments, adding a lump sum or taking on more or less risk.

* More on Bestinvest’s new SIPP transfer offer

- Bestinvest is offering £250 cashback per customer on pension transfers of £30,000 or more, whether someone is transferring an existing SIPP or tidying up old workplace pension pots.

- Transfers qualifying for the offer also receive up to 50% off Best SIPP service fees for shares and funds held in the account, with service fees on funds and shares frozen at 0.2% or lower for higher balances.

- Up to £500 towards exit fees from other providers is also available for transfers over £50,000.

To secure the reward, customers must make a full account transfer worth £30,000 or more to a Bestinvest pension account. They must then invest the money once it hits their account as the offer does not apply if the money is left in cash and then register for the promotion online or by email.

The transfer must be initiated between 31 May 2023 to 31 August 2023 and remain invested, not held in cash, for at least six months after the offer has ended. If you qualify, your cashback reward will be paid to an Investment Account if you have one or to your nominated bank account shortly after this six-month period has elapsed, i.e., not before March 2024.

Terms & Conditions and exclusions apply.

Regardless of the choices you make you should always remember that investments go down as well as up and you may get back less than the amount originally invested. SIPPs are not suitable for everyone. If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you, then a SIPP may not be right for you.  This press release does not constitute personal advice.  If you are in doubt as to a course of action, you should seek professional advice. Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change.