When it comes to planning for retirement, it’s important to understand how pensions work. Generally speaking, a pension is an amount of money you receive when you say farewell to the working world.
But pensions aren’t all the same, and in the UK, there are three main types of pensions which all come with their own rules and benefits. If you’re living and working in the UK, you may be eligible to receive a state pension, provided you’ve made enough national insurance contributions.
Also, if you’re employed, you should be enrolled in a workplace pension where a portion of your salary is put aside for your later life.
Another way to save for your retirement is to contribute into a personal pension.
Also known as SIPPs (Self-Invested Personal Pensions), personal pensions come with many advantages and could help you get the retirement of your dreams. Here are five reasons why paying into a SIPP could be a good idea.
A SIPP gives you more control over your pension pot
With a SIPP, you get to take control of your retirement. Typically, with a state pension, contributions are made on your behalf and you don’t have a say on how much goes into your pot.
Similarly, if you’re enrolled in a workplace pension, you’ll need to contribute at least 5% of your pay in your pension scheme (and your employer will top up by paying a minimum of 3% of your pay.
With a SIPP, there’s no such rule. You can choose the exact amount you want to contribute, which means, if you decide to open a SIPP with a digital investment service, like Wealthify, you’ll be able to start with just £50.
Also, with a SIPP, you could gain access to a wide range of investments, such as shares, bonds, and property. If you decide to pick your own investments, you’ll be free to choose what you want to include in your SIPP.
If you’re more comfortable using an online platform that does it all for you, you’ll be able to choose your investment style that will determine what your money gets invested in. For instance, at Wealthify, you can be cautious, adventurous, or somewhere in between. If you opt for cautious, your money will mainly be invested in more bonds.
If you go adventurous on the other hand, you will have a greater portion of shares in your plan. The choice is totally up to you. But it doesn’t stop there. With Wealthify, you can make your SIPP ethical and have your money invested in companies that are striving to do their bit for the future.
With a SIPP, you get a little boost from the government
When you pay into a SIPP, you’ll receive a 25% top up. So, if you plan on investing £100 in your SIPP, you’ll only need to put £80 in your account, and the government will add the remaining £20.
If you’re a higher or additional rate taxpayer, you could expect to get a higher top up. To claim your extra boost as a higher or additional rate taxpayer, you’ll need to contact HMRC to claim the extra boost. The amount you can invest tax-efficiently is limited though.
Currently, the annual limit is set to £60,000, or 100% of your earnings, whichever is lower – this pension allowance is the combined contributions made by you and the government. If your pension contributions exceed £60,000, or the totality of your earnings, you may need to pay tax on the extra amount which is in your SIPP.
A SIPP offers more flexible retirement options
Paying into a SIPP means that you have more flexibility over your retirement options. You can start withdrawing from your pension when you turn 55, and you can take up to 25% of your money as a tax-free lump sum.
Also, many SIPPs, like the Wealthify Pension, will let you choose how to take your funds out – this is known as ‘defined contributions schemes.’
You’ll be able to either withdraw your whole pension as a lump sum in one go, take out lump sums when you need them, or get paid a regular income based on your pot size.
A SIPP could help boost your retirement income
Many people think that they’ll be just fine with the state pension, but research would suggest otherwise. According to a recent study, you’d need at least £10,200 a year to cover all your basic needs in retirement1.
With the full state pension currently set at £10,600, you would likely struggle to cover all your expenses and may struggle to make ends meet during your later life. So, it’s important to consider other pension options to help boost your future retirement income.
If you’re paying into a workplace pension and your finances are in good shape, you could increase your contributions.
Also, it could be worth having a look at SIPPs. Since you can make your own contributions, paying into a SIPP could be a great way to boost your retirement. And the good news is that you don’t need to pay in big lump sums.
Investing little and often could also help you build a decent retirement pot.
For example, if you put £50 a month in your Wealthify Pension and let your money work for 40 years, you could end up with £60,817.472.
If you’re self-employed, a SIPP could help you save more
In the UK, there are about five million self-employed people3, and over 60% aren’t saving in a pension4. Needless to say, the situation is challenging, but it’s not hopeless. If you’re self-employed, it’s possible to take control of your finances for later life.
Make sure you’re on top of your own national insurance contributions and consider opening a SIPP. That way, you’ll have a pot where you can put money aside for your retirement.
2: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £36,304.77. If markets perform better, your return could be £122,758.39. Values correct as of 18/07/23.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.