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 (Self Invested Personal Pension).
1. Add to your savings pot with 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. In the current 2017/18 tax year, an investor can receive up to 45 per cent tax relief when they make a contribution to a personal pension such as a SIPP, with 20 per cent paid by the HMRC to the pension and any higher and additional rate tax relief reclaimable from HMRC.
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 per cent, 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 per cent 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 their pension contribution annual allowance.
2. Wide 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.
The Charles Stanley Direct SIPP, for instance, gives you freedom and control over the investment decisions made, and you can access an extensive range of investments including over 3,000 funds, listed UK and certain overseas shares, as well as gilts, bonds and Exchange Traded Funds. You choose where and when to invest your money.
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), and income that could be varied during retirement to accommodate changing needs.
You 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. With the Charles Stanley Direct SIPP you can start contributing from as little as £100 per month or a £500 lump sum with no requirement to make regular payments.
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 single-tier state pension has a ‘full level’ of £159.55 a week (£8,297 a year) in 2017/18, which is unlikely to be sufficient to maintain most people’s lifestyle.
Due to people living longer, the age at which you can claim the State Pension is also increasing. Under the current timetable, the State Pension age is due to rise to 66 by 2020, 67 by 2028 and 68 by 2039. To calculate when you’ll reach State Pension age and how much you may get visit: https://www.gov.uk/check-state-pension.
5. You may 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 and 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.
This article is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. The taxation of pensions depends on individual circumstances and is subject to change in the future. If you are unsure of the suitability of your investment please seek professional advice.