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Five reasons to consider a SIPP

Written by: Rob Morgan
With the basic state pension unlikely to support most lifestyles in retirement, here are five reasons you may want to consider using a Self-Invested Personal Pension (SIPP).

Almost everyone includes a comfortable retirement as one of their financial goals, and building up pension benefits is often a highly attractive means of achieving this. One pension option offering great flexibility is a SIPP.

Here are five reasons you may want to consider a SIPP as part of your retirement planning:

1) Tax relief

Investing through a pension scheme can be very attractive because of the tax breaks. Income tax relief is available on pension contributions, and this can considerably improve the amount of income you could receive in retirement compared with other methods of investing.

Currently, an investor can receive up to 45% tax relief (based on their taxable income) when they make a contribution to a personal pension such as a SIPP, with the basic 20% paid by HM Revenue & Customs (HMRC) to the pension while any higher and additional rate tax relief can be reclaimed.

For example, an investor contributes £8,000 into their SIPP and £2,000 is claimed back from HMRC by the pension provider. A higher rate tax payer could claim back up to a further 20%, reducing the overall cost of the contribution to as little as £6,000. In the same instance, additional rate tax payers could claim back up to a further 25% making the cost just £5,500 for a £10,000 contribution.

Remember, the tax treatment of pensions depends on individual circumstances and is subject to change in future. In particular, there are restrictions for higher earners that reduce the standard pension contribution annual allowance.

2) Investment choice

Some pensions only have a narrow range of investment options, which may be fine for less “hands on” investors. However, if you are looking to maximise the range of possible investments a SIPP may be worth considering.

As an example, you could opt for a more cautious/income-producing fund such as the Investec Diversified Income fund. It’s managed by John Stopford and draws upon the combined knowledge of the bond and equity teams at Investec in aiming to produce a sustainably high income (presently it yields over 4%, variable, not guaranteed) while providing  modest capital growth. Stopford also seeks to reduce risk by ensuring there is a diverse range of assets, and historically the fund has experienced less than half the volatility of UK equities.

Or for the more adventurous, the Artemis Strategic Assets fund contains a mixture of assets with a core of equity holdings, mainly large, blue chip companies in the UK and US, but also invests in bonds, commodities and currencies as well as using cash tactically. The manager, William Littlewood, can also ‘short’ assets to profit from falling prices. The best way to view the fund is as a diverse portfolio of assets with some additional powers at the manager’s disposal aimed at smoothing out the peaks and troughs of the market, or generating additional returns from his economic views. With extra tools to diversify the portfolio and control risk, I believe it’s a fund worthy of consideration for investors looking for a core long-term holding.

3) Flexibility before and after retirement

Many people no longer need to buy an annuity (a policy that provides a secure income for the rest of your life) with their pension pot. Instead, money purchase pensions such as SIPPs have flexible retirement options.

Lump sums can be taken at any time after the normal minimum pension age (currently 55 under the Pension Freedoms rules), and income that could be varied during retirement to accommodate changing needs. They could, for instance, help fill an income gap between early retirement and the age at which you receive your State Pension benefits or income from a defined benefit scheme (such as a final salary scheme).  An annuity, however, remains attractive for those who require a secure income and do not wish to take an investment risk with some or all their pension.

Contributions to SIPPs are also flexible.

4) The State Pension is not enough

The State Pension is a regular payment from the government that you can receive when you reach State Pension age. The amount depends on how many years you have paid National Insurance contributions. The current basic State Pension is £119.30 per week (£6,204 a year) for a single person, which is unlikely to be sufficient to maintain most people’s lifestyles.

Due to people living longer, the age at which you can claim the State Pension is also increasing. Under the current timetable, for men it’s 65 and for women it’s in the process of rising from 60 to 65 by November 2018, with the exact date depending on the month you were born. The State Pension age is due to rise to 66 by 2020 and 67 by 2028. You can calculate when you’ll reach State Pension age and how much you may get via the government link.

5) You need to save more or you are self-employed

If you are employed, contributing the amount needed into your employer’s scheme to attract your employer’s highest level of contributions is a simple way to make efficient use of your money. You may of course have to save even more to meet your retirement objectives but this is generally the priority over other forms of investment.

If you are self-employed you may consider it best to keep your finances flexible to cater for any downturns in earnings. Yet pensions should not be ignored. You could benefit from tax relief, and depending on your level of earnings, pension contributions could bring you below certain tax thresholds.

Rob Morgan is a pensions and investments analyst at Charles Stanley

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