11 ways SIPPs can help you achieve a dream retirement

When self-invested personal pensions (SIPP) were launched in 1989, the target market was wealthier, sophisticated investors. But during the tax wrapper’s 35-year lifespan, its reach has widened significantly. Due to a combination of regulatory shifts and enhancements in technology, SIPPs are now the go-to choice to home savers' private retirement savings.

A SIPP is a type of pension that gives you greater control over your retirement planning – something investors crave. This assertion is underscored by a report from consultancy MoretoSIPP, published earlier this year. The research found that SIPP assets on online investment platforms, such as interactive investor, have swollen to almost £200 billion.

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Given the flexibility, wide investment choice, and in many cases low costs, it’s no surprise savers with varying levels of wealth are flocking to SIPPs.

So, to mark the 11th Pensions Awareness Week, here are 11 reasons why you might consider a SIPP to either grow your future wealth or support your retirement income goals.

1) Get government boost and possibly trim your tax bill

As with all pensions, with a SIPP you get tax relief in the shape of a 25% government boost on what you pay in, provided annual contributions don’t exceed the lower of 100% of earnings or £60,000 (note: if you earn more than £260,000 or have made taxable and flexible withdrawals from your pensions, annual contributions might be restricted to £10,000).

Even if you have no earned income, you can pay in £2,880 (boosted to £3,600 with tax relief) into a SIPP every year.

Upfront tax relief gives your retirement savings an immediate shot in the arm. What’s more, if you pay higher rates of tax, you might be able to claim an extra 20% or 25% of the total contribution (your payments plus the government top up) via self-assessment – helping to trim your annual tax bill and put more money towards your future.

2) You can use to save for retirement or draw later-life income

SIPPs have the advantage over many other pensions of being dual purpose: you can use them to build a retirement nest egg and draw an income in later life, too.

If you decide to keep your SIPP savings invested in old age, the upside is that you don’t have to switch to a different plan once you pack up work. Purely turn on the income tap and away you go. Retirement, however, can prove a timely juncture to review your investment strategy given your objective has likely shifted from growth to income.

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3) Any money you make is tax-free

Any investment growth within a SIPP escapes capital gains tax (CGT) and you don’t pay tax on dividends, either, aiding your money to grow faster.

Given the top rates of CGT on investments and dividend tax are currently 20% and 39.35%, respectively, this can deliver a sizeable boost to your eventual retirement pot, improving your financial security in old age.

4) Consolidate several pensions into one

If you’ve changed jobs frequently throughout your career, you may have accumulated multiple pensions. Various studies show workers typically have five jobs by the time they hit age 35, and with every employer swap comes a new pension plan.

This can lead to pots being lost, forgotten about, or neglected – especially if you’ve moved home during this period, too. To assuage the admin headache that can come with having lots of pensions scattered around, you can bring them under one roof within a SIPP. This can make things easier to manage, and potentially save costs.

Just be sure to check beforehand that you won’t lose any valuable guarantees in the process.

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5) No IHT to pay on death

Knowing that large chunks of your wealth could be swallowed up by the dreaded inheritance tax (IHT) can be a bitter pill to swallow – especially at a top rate of 40%.

But did you know, any money wrapped up in a SIPP is sheltered from IHT, no matter when you die? And if death occurs before age 75, your SIPP beneficiaries also won’t pay income tax on any withdrawals.

6) Option to stagger your tax-free cash

Most pensions allow you to take 25% of your total funds tax-free at retirement, up to a maximum of £268,275. But you don’t have to take the lot in one fell swoop. Something that’s becoming increasingly popular, is to take tax-free cash in stages using a SIPP, which can be attractive for three reasons.

First, it means you don’t have to commit to either drawdown or an annuity. Second, if your money continues to grow, the amount you can draw tax-free will increase over time. And third, as noted above, any pensions you haven’t drawn is exempt from IHT, unlike money in your bank account.

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7) Thousands of investments to pick from

Broad investment choice is a key reason why investors choose SIPPs. With a platform like interactive investor, you have thousands of funds, investment trusts, exchange trade funds (ETF), bonds, and single shares to choose from, allowing you to choose the right assets for your specific investing style and retirement goals.

If you’d rather not spend the time and effort to research your own investments, something like the ii Super 60 offers plenty of ideas about what might be right for you.

8) Loved ones can inherit a SIPP

While no one enjoys thinking about what will happen when they die, SIPPs provide the comfort that your hard-earned savings won’t disappear into the ether. In fact, SIPPs can cascade down generations, giving younger loved ones a welcome boost to their retirement savings.

What’s more, any investment growth will escape tax in the future, and your heirs have the option to draw the money before age 55 - the current minimum for accessing pension savings - should they want or need to.

Not all SIPP providers offer this feature, so if it’s important to choose with care. Nominated SIPPs, as they’re called, are a fantastic way of keeping wealth within the family in a tax-efficient way.

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9) SIPPs are for life

Making pension contributions for a child may seem premature given it might be five or six decades before they can enjoy the benefits. But due to the superpower of compound growth, this can prove a lucrative strategy, as this article from Faith Glasgow illustrates.

You can start a SIPP for a youngster from the day they’re born, pay into one until age 75, and draw an income until the day you die; SIPPs are very much for life.

10) Income options to suit your retirement goals

One of the key decisions when you reach retirement is whether to buy a guaranteed income, take flexible withdrawals, or do a bit of both.

A core benefit with SIPPs is the carte blanche to draw money out as and when you please. That could involve a fixed, regular income to replace your salary, or making one-off withdrawals. Whether you plan a hard-stop from work or prefer to wind down gradually and phase into retirement, a SIPP can support your retirement income goals.

Unlike some other retirement income products, SIPPs allow you to keep your options open. For instance, once you’ve bought a lifetime annuity, the terms you choose at outset are fixed. You can’t switch into a SIPP down the line.

However, with a SIPP, you have the freedom to use some or all your savings to buy a guaranteed income in the future should your circumstances or goals shift.

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11) Pay in what you like, when you like

Given the nature of their work, the self-employed usually have fluctuating and irregular earnings, and therefore need a pension that caters for this.

To guard against potential cash-flow problems, contributing a large sum into a pension every month might be off the table.

But with a SIPP you can choose a contribution strategy to suit your needs, which might involve adding a lump sum towards the end of the tax year once profits and affordability are clearer.

And it’s not just the self-employed who should consider paying into a SIPP. They’re also useful for employees who’ve maxed out their workplace pension benefits.