We all dream of spending our golden years doing what we love without worrying about money. But planning for retirement is no easy task. According to a recent study, you’ll need at least £10,200 a year to have all your basic needs covered1. At £9,100 per year currently, the full State Pension isn’t even enough to cover the minimum living costs you’ll likely face during your golden years2. So, it’s important to look at other options that could help you live the retired life you’ve always envisioned. But that’s not all! Whether you’re employed or self-employed, investing in a SIPP (Self-Invested Personal Pension) could be a great way to boost your future retirement income.
What is a SIPP?
A SIPP is a type of personal pension that gives you control and flexibility over your retirement pot as you can make your own pension contributions. Also, with a SIPP, your money will typically be invested in a wide range of investments, including shares, bonds, and property.
Paying into a SIPP comes with many advantages. The main benefit is that it allows you to build up wealth in a tax-efficient way. What do you mean, you ask? With a SIPP, or personal pension, you’ll receive a 25% top up. Put simply, you’ll get a little boost, which could help maximise your potential returns over the long-term. If you’re a basic rate taxpayer, you’ll only need to contribute £80 for a £100 contribution as the government will pay the remaining £20 in tax relief. If you’re a higher or an additional rate taxpayer, you could expect to receive an extra boost. One thing to keep in mind though is that you’ll need to contact HMRC to get the extra top up.
Money put in a SIPP cannot be accessed until you reach the age of 55, but you can keep paying into your account until you’re 75. Once you turn 55, you’ll have the possibility to take up to 25% of your pension money as a tax-free lump sum.
How much can I put in a SIPP?
Each tax year, you can put as much as you want in your SIPP, but the amount you’ll get tax relief on is limited to £40,000, or 100% of your earnings (whichever is lower) - this pension allowance is the combined contributions made by you and the government. For instance, let’s say you earn £30,000 a year, but put £35,000 into your pension pot (because you’ve dipped into your savings), you’ll only get tax relief on £30,000. Similarly, if you earn £50,000 and decide to put this amount in your SIPP, you’ll only get tax relief on £40,000.
Who can open a SIPP?
Any UK resident under the age of 75 can open a SIPP. Personal pensions and SIPPs are particularly well designed for people who are self-employed. When you’re self-employed, there is no one to choose a pension scheme for you and no employer contributions, which can make retirement planning difficult. If you’re in this situation, investing in a SIPP could help you take control of your golden years.
When can I use a SIPP?
There’s no right or wrong age to open a SIPP. But if you want to make the most of your retirement journey, it could be a good idea to begin sooner rather than later. The earlier you start putting money aside for your golden years, the sooner your money could potentially grow and benefit from compound interest. When you pay into a SIPP, your money gets invested in companies and as a result, you could enjoy some of their profits in the form of dividends. The magic happens when dividends get reinvested. By putting your earnings back into your pot, your money could quickly add up and over a number of years, your retirement savings could grow exponentially bigger.
How to start investing in a SIPP
If you’re looking to invest in a SIPP, there are many routes you could take. You could choose to do it yourself and pick your own investments. However, this strategy can be time-consuming and typically requires some investment knowledge. But don’t worry, if you’re too busy or don’t feel confident enough to do it yourself, there are other options that could help you get started. Thanks to digital investing services, like Wealthify, the hard work is done for you. With our Wealthify Pension all you need to do is choose how much you want to invest and the risk level that suits you. We’ll build you a Plan with just the right mix of investments and manage it on a regular basis. Also, every time you add money to your pension, we’ll automatically add the government’s top up to your pot and invest it for you – this will be done at the same time as the contribution is made.
The personal pensions we offer are defined contribution schemes, which means that the pot size is what you’ve put in, plus any growth defined by the contributions made. In other words, when the time to access and use your pension pot comes, you’ll be able to choose between taking your whole pension as a lump sum in one go, withdrawing lump sums when you need them, or getting paid a regular income based on your pot size. Whatever option you go for, you’ll be able to take 25% of your pension pot tax-free.
If you have any questions about our Wealthify Pension, please don’t hesitate to contact us.
Working out how much you need to save in order to retire can be tricky, but luckily, our pension calculator does all the hard work for you. In four simple steps, you can get a good idea of whether you’re on track or not. Try it today and see what you could get.
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.