What on earth is a ‘SIPP’?! A jargon-free guide on how it could help boost your ‘future you’ fund
Camilla Esmund is a senior manager at Interactive Investor, the UK’s second largest platform for private investors
Don’t be put off by the acronym – a ‘SIPP’ stands for a self-invested personal pension; a type of personal pension which gives you greater control over your retirement planning. If you haven’t heard of them, you’re not alone – as with many topics related to pensions, they’re still not very well understood. The pension landscape is too complex and full of change, and the knowledge gaps around pensions are concerning; we have a retirement crisis in the UK.
Research, including our own at interactive investor (ii), shows that many people are retiring with far less than they expect or need. We must empower consumers when it comes to their pension wealth, and their options.
Even the word ‘pension’ presents a barrier – particularly for people of a younger working age. My view is that it becomes synonymous with uncomfortable thoughts of difficulty in old age. But regardless of the terminology, the reality is your pension is the fund for your ‘future you,’ and it is of upmost importance.
We all want to feel more confident and in control of our financial futures, and luckily there are ways to achieve this. Though not suitable for everyone, a SIPP gives you the freedom to take the driver’s seat. So, let’s break down some of the advantages.
Flexibility
SIPPs offer flexibility in terms of contributions. This makes it a more obvious choice for self-employed people who tend to have fluctuating and more irregular earnings and therefore need a pension that caters for this. However, they’re not just for self-employed. They can also be useful for employees who’ve maxed out their workplace pension benefits, for example.
There’s also flexibility in terms of choice. With a SIPP, you call the shots how and where you invest – great for those who are happy to pick their own investments. With a platform with lots of choice like ii, you have thousands of funds, investment trusts, exchange trade funds (ETFs), bonds, and single shares to choose from, so you can build a portfolio which suits your needs. If that amount of choice sounds intimidating, though, there are tools out there (we have a ‘Quick Start’ Range and a rated list of funds called the ‘Super 60’) which can give ideas about what might be right for you.
By way of a quick snapshot of what our customers invest in – on ii, funds are the most in-demand investment vehicle for SIPP investors, with investment trusts remaining extremely popular with older investors. Exchange-traded funds (ETPs or ETFs) are gaining popularity, particularly with younger SIPP investors who want to be able to own the whole market in an affordable way.
A home for ‘forgotten’ pensions, and a chance to keep more of your money
Another advantage is you can bring your pension pots under one roof within a SIPP. Many of us have multiple jobs in our lifetime, meaning pension pots will be lost or forgotten about. Research suggests at least 4.8 million pension pots were considered to be ‘lost’ among the UK population in 2023, with nearly 1 in 10 workers believing they could have lost a pension pot worth more than £10,000. Consolidation can make your retirement savings easier to manage – just make sure you don’t lose any valuable guarantees in the process.
This might also save you money. Some pensions, especially older ones, have higher charges or fixed policy fees. By bringing everything together in a SIPP, you could reduce the cost of managing your pension, so more of your money stays in your pot. Overpaying on fees/charges can make a big dent on your wealth if left unchecked! I cannot emphasise that enough.
If you’re unsure, you can speak to a financial adviser. Plus, if you have a defined contribution pension scheme and are 50 or over, then you can access free guidance on your options by booking an appointment with Pension Wise.
Tax benefits
Next, the tax advantages – and this has perhaps never been so crucial. SIPPs are tax-efficient ways to save. Any investment growth within a SIPP escapes capital gains tax (CGT), plus – you don’t pay tax on dividends, either. This can give a sizeable boost to your eventual retirement pot, improving your financial security over the long-term.
As with all pensions, you also get upfront tax relief at your marginal rate. You receive an immediate 25% government boost in the shape of a government top up and can claim back extra via self-assessment if you pay 40% or 45% tax.
You can keep your options open
SIPPs are also dual purpose: you can use them to build a retirement nest egg and draw an income in later life, too. In fact, with SIPPs you can draw money out as and when you please (you can normally only access the money from age 55, rising to 57 from 2028).
That could involve a fixed, regular income to replace your salary, or making one-off withdrawals. Essentially, it means you can keep your options open, which might help savers feel less overwhelmed by the various retirement options, especially if your circumstances or goals shift.
Need some inspiration?
We launched an ‘ii SIPP index’ comparing how ii SIPP customers invest both before retirement (accumulating wealth) and after retirement (in drawdown). It also shows the impressive performance of our SIPP customers over the last two years, and it is impressive. It may be worth looking at how some of our savviest ‘SIPPers’ are investing theirs!
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Important information – SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial adviser before making any decisions. Pension and tax rules depend on your circumstances and may change in future.
This information is for educational purposes only, and should not be considered financial advice.