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Six ways to get the most from your DIY pension

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A self-invested personal pension or SIPP is a DIY pension, which enables you to choose your investments, giving you more control over your retirement income.

Generally SIPPs invest in funds, stocks, shares, and commercial property. However, some providers will allow more esoteric investments such as unlisted company shares, gold and intellectual property. SIPP providers will generally have a list of assets they are comfortable in dealing with and this should be available on their website or by asking.

Here, Maike Currie, investment director for Personal Investing at Fidelity International, offers six tips to get the most out of your SIPP:

  1. Take hold of the investment reins

The beauty of a SIPP is that it allows you to draw an income from your pension, giving you greater control over your savings and investments. Plan things carefully and your pension fund will not only provide a steady stream of income but you could also continue to grow your pot over time.

The flipside is that your investments are at the mercy of the markets so protect yourself by being properly diversified. Make sure the asset allocation of your portfolio is in line your risk appetite and retirement goals.

  1. Prepare for rainy days

Keeping your pension fund invested under drawdown means that falling markets may reduce the value of your pot and ultimately the income you are able to draw from it. If this occurs, you may need to temporarily reduce the amount of income taken to avoid the risk of running out of money over the long term.

One option is to hold cash reserves so you don’t have to touch your actual investment during market dips. Depending on how much income you are drawing, the cash you hold should typically be enough to finance between one to three years’ worth of pension income payments.

  1. Bring your pension pots together

If you’ve worked for a number of employers over your career, chances are that you have accumulated several pension pots. A SIPP can be a useful vehicle to help you consolidate all these pots into one place, making it easier to monitor and manage your pension savings.

Make sure you read the small print though as there can be costs involved when moving a pension – some policies have penal charges for moving pots before the retirement age you selected.

Find and consolidate your lost pensions: our 4-minute ‘how to’ video

  1. Keep an eye on costs

SIPPs come with a variety of different charging structures so take the time ensure you look under the bonnet to really understand the costs involved.

The last thing you want when it comes to your hard earned pension savings is to get stung with any nasty hidden charges.

  1. Make the most of the tax relief

In terms of tax relief, SIPPs are currently one of the most generous savings vehicles available, so if you are able to, it’s worth making the most of this benefit while you still can. You will automatically receive basic-rate tax relief on your contributions. For example if you want to pay £10,000, you only need to put in £8,000 as £2,000 will be claimed from the tax man and added to your pension. Higher rate tax payers can claim back more in tax relief, depending on their earnings.

With pensions, the tax man allows you to use any unused allowance from the previous three tax years as well as this year’s quota. This is known as Carry Forward. If you can afford to, it’s worth considering using up not just this year’s allowance but any allowance left over from previous years as well.

  1. Use your SIPP to leave a legacy

Your children can inherit your pension without paying the high death charges previously levied. If you pass away before age 75 there will be no tax to pay. After age 75, the amount of tax will be determined by the income tax position of the person inheriting the pension. Pensions also fall outside of your estate, so there won’t be a nasty inheritance tax bill for your children.

If you have significant savings in other assets such as ISAs and general investment accounts, it may be wise to use these and delay taking your pension so that more of your legacy ends up in your children’s hands.

The new rules mean that a pension which is passed on can be further inherited upon death by the next nominated successor. In many ways, pensions have become the ultimate intergenerational savings vehicles – it’s possible that even your grandchildren could benefit from your SIPP!

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