What is a SIPP?

SIPP stands for self-invested personal pension. It's an investment account with tax benefits that you manage yourself to help fund your retirement. You put in the money, which is then topped up by the government, and you decide how to invest it. We call ours the Vanguard Personal Pension.

What do SIPPs do?

SIPPs are extremely tax-efficient investment accounts that with regular contributions can help you to meet your long-term retirement goals.

Why might you want a SIPP?

It depends on your individual circumstances. For example, you should consider using up any auto enrolment/employer scheme matching available to you before investing in a SIPP. After all, you don't want to miss out on those employer contributions. 

But what if you're self-employed or work as a contractor and you don't have access to a workplace scheme?

What if you've often changed jobs, or expect to change jobs often, and as a result want a flexible and portable type of account in which to consolidate your different pension savings?

What if you're targeting a certain amount of income by the time you retire and need to top up your pension savings in order to reach that goal?

These are some of the types of questions that might lead you to take out a SIPP.

What are the tax benefits of a SIPP?

Investments in SIPPs aren't subject to income tax or capital gains tax, just like in other pensions. You also receive tax relief on your SIPP contributions. This means some of the money you would have paid in income tax on these earnings is paid back into your SIPP by the government.

How does pension tax relief work?

The tax relief you get on your pension contributions depends on the income tax you pay; the higher it is, the bigger the potential saving.

If you're a basic-rate taxpayer and you want to make a £100 contribution to your pension, it would actually cost you just £80 of your salary. The government adds an extra £20 on top – the 20% it would have taken in tax from £100 of your salary. And if you're a higher-rate (40%) or additional-rate (45%) taxpayer, you can claim back a further 20% or 25%, respectively. In this way, it's theoretically possible to pay as little as £55 to achieve £100 of pension savings.

Are there any limits to this tax benefit?

If you're a UK resident for tax purposes you can usually contribute 100% of your relevant gross UK earnings, or £3,600 if this is greater, and receive tax relief each year – up to a current annual allowance of £40,000 for most people.

Unlike with an ISA, you can also carry forward unused allowances. As long as your pension contributions amount to no more than 100% of your earnings, you can use unused allowances from the previous three tax years if you've been a member of a pension during this period.

The annual allowance on pension contributions can be tapered for people earning more than £200,000. But it depends on the level of your pension contributions, among other things. For more information speak to an accredited financial adviser.

What about inheritance tax? 

Another, perhaps less-well-known tax benefit of a SIPP is that it can help with inheritance tax planning. This is because anything left in your SIPP when you die typically falls outside of your estate for inheritance tax purposes.

So what happens to my SIPP when I die?

It depends when you die. If you die before your 75th birthday, then your designated beneficiaries will inherit your SIPP holdings tax-free. As long as you haven't breached your lifetime allowance¹, they can take this tax-free inheritance as a lump sum or as income at a time of their choosing².

If you die after you're 75, then your nominated beneficiaries will be taxed at their marginal rate of income tax as they withdraw funds from the SIPP.

Remember, though: your personal pension isn't covered by your will, so the onus is on you to tell your pension provider who the beneficiaries of your SIPP will be.

In what other ways are SIPPs flexible?

SIPPs are a handy single account for managing your retirement saving needs that put you in the driving seat.

You can pay in what you want when you want, subject to the relevant annual allowances, and invest this money in a manner of your own choosing. Your spouse or employer can also pay into your SIPP.

And once you retire you can take full advantage of pension freedoms to draw down your assets in a manner of your choosing, whether it's taking it as a lump sum (up to 25% tax-free) and/or as income.

You can normally access the money in a pension from the age of 55.

Can I use a SIPP to order my retirement finances?

Yes. Jobs for life are rare these days and getting rarer. If anything people change jobs more frequently. Sometimes they even change careers. So what are you going to do with all those pensions you've accumulated along the way (and may have even forgotten)?

One possible solution is to consolidate them all in a SIPP. By doing so, you can keep track of all your retirement finances more easily, as well as cut down on paperwork.

You might also save money if you move to a lower-cost provider. But beware exit fees and make sure you don't miss out on any safeguarded benefits when looking to transfer funds between pension providers. If you are in any doubt, please speak to a financial adviser.

Please remember the value of investments can go down as well as up, so you might get back less than you invest.

What can I invest in with a Vanguard Personal Pension?

Investors can access the full range of Vanguard funds available on the Vanguard platform. These give you instant exposure to ready-made portfolios made up of hundreds, even thousands, of individual company shares and corporate and government bonds from around the world. So you can spread your investment risks more easily.

Some Vanguard funds, like our LifeStrategy range of funds, are carefully calibrated to make investing less complex and help you meet your investment goals more easily. Our Target Retirement Funds are even more low maintenance and automatically adjust the closer you get to retirement – and after you get to your retirement too as your savings are drawn down.

 

 

¹ £1,073,100 in 2020-21.

² May be subject to age restrictions