Take control of your pension – a guide to SIPPs

According to recent reports, a rising number of Brits are failing to save enough for their retirement. In fact, around 35% think that saving for a potential emergency is more important, which is placing their long-term financial future in danger.

This is particularly true given the dwindling value of the existing State pension in the UK, which continues to decline as the national retirement age rises.

Fortunately, Self-invested Personal Pensions (SIPPs) can help people to optimise the value of savings. So here’s brief guide to SIPPs and their benefits to savers.

What is a SIPP?

In simple terms, a SIPP is a personal pension that offers you access to a more diverse range of both domestic and international assets.

At the same time, it also offers you greater control over your finances, which is ideal if you have specific market knowledge and are able to leverage this to your own advantage.

Like other pension vehicles, SIPPs are also able to grow free from Income Tax and Capital Gains Tax, while they’ll also offer relief on your own contributions. Any money that you invest into your SIPP will be topped up by 20% by the taxman, while higher and additional-rate tax payers could claim an extra 20-25% in relief.

In the case of some providers like Bestinvest, you may even be able to transfer existing pension funds into a single SIPP while potentially having some of the associated costs of changing providers covered. This can save you up to £500 in exit fees in some instances, while also creating an easier-to-manage pension that can driver higher returns.

Breaking down SIPPs and the associated jargon

Beyond these basics, you may find that SIPPs are surrounded by a number of niche industry terms that are largely unfamiliar. This type of jargon can deter savers from opening such accounts as they believe them to be too complex and difficult to manage.

Aside from the fact that you can open a SIPP that is managed by experienced wealth managers, you can also break down some of the jargon to create a far greater level of understanding.

You’ll often hear the term ‘annual allowance’ used in relation to SIPPs, for example, which is the amount you can pay into your account each year while benefiting from tax relief.

In the current tax year, the annual allowance is £40,000 for anyone with income of up to £150,000 each year. Anyone with more than £150,000 of income has a tapered annual allowance, reducing by £1 for every £2 of income above £150,000, down to a minimum of £10,000 for those with income of more than £210,000. .

‘Annuity’ is another often misunderstood example of SIPP terminology, and one that is also synonymous with traditional pensions. This is a method of drawing income from your fund, as when you purchase an annuity you pay a lump sum to receive a guaranteed income for life.

This income will come in exchange for some or all of your retirement savings, so it’s something that requires detailed consideration before you make an informed and final decision.