An overview of your options and how to make the most of each type of pension
A SIPP (Self-Invested Personal Pension), is an independent pension that gives you the freedom to manage and choose how your pension pot is invested.
As with a traditional workplace pension, you will receive tax relief from the government on your own personal contributions and you can access the money in your SIPP from the age of 55. There are several ways in which you can take money from your SIPP, giving you the flexibility to access funds according to your circumstances
SIPPs can be inherited – with a few caveats. If you die before the age of 75 the whole pension sum can be inherited tax-free. If you die after you turn 75, your beneficiary/beneficiaries will need to pay tax on the benefits at their income tax rate.
A workplace pension is usually arranged for you through your employer. They’re also called company pensions, or work-based pensions, and are created by putting a percentage of your monthly pay into your pension pot each month which your employer also contributes to.
Under current rules, if you’ve been automatically enrolled in a workplace pension your employers must contribute a minimum 2% to your pension, and you must contribute 3%, bringing the total to 5% per annum. From April 2019, these amounts will rise, requiring employers to contribute a minimum of 3%, and employees to contribute 5%, bringing the total to 8% per annum. Your employer may offer to contribute even more than this, which is a great way to help boost your pension pot.
With net pay, your total pension contribution is taken automatically and this includes the tax relief, and this is the amount you will see on your payslip.
With relief at source, it is only your personal contribution that is included, so you’ll have to redeem your tax relief by completing your tax return. You will only see your personal contribution on your payslip.
It may also be possible to withdraw your entire pot (and receive the first 25% of it tax-free, like a SIPP), but you will be charged Income Tax on the rest regardless of how much you’ve saved. This is also the case for a defined benefit (DB) pension.
There’s no longer a default time for when you can receive the state pension from the government. To find out when you’ll likely be eligible to draw yours, you can use the government’s State Pension Age tool to calculate your age of eligibility.
Currently, the full state pension is £164.35 a week but the amount you receive will depend on your National Insurance contributions throughout your lifetime. The full amount might be higher if you’ve deferred withdrawal of your state pension or if you have an additional state pension.
You are still eligible for a state pension if you have a SIPP or workplace pension.
To work out how much you will need in your pension pot when the time comes to retire, you’ll first need to figure out how much retirement income you expect to receive in order to live comfortably. Drawing up a retirement budget can be a good place to start. This should take into account the lifestyle you want to lead in your retirement, as well as your expected monthly outgoings. Some key considerations are – will you have paid off your mortgage by the time you hit retirement? How much travel would you like to do?
From here you should check your retirement estimates. Ask for the most up-to-date statements from your SIPP or other personal pensions and your workplace pension. Consider the addition of your state pension and then try to work out how you’d like to draw your pensions as well as the age you can access these.
It’s also worth tracking down any pensions that you may have opened years ago using tools such as the Pension Tracing Service. They can be contacted on 0345 6002 537 from 8pm to 6pm Monday to Friday.
Another way to help boost your income is to defer receiving your state pension. For every nine weeks you defer your state pension, your pension will increase by the equivalent of 1%, which means after a year it will have increased by 5.8%.
One-off lump sums are another smart way to boost your pension because you’ll get tax-relief. For example, if you decide to pay in £1,000 to your pension, the government will add an addition £250 on that in tax relief. If you’re a higher or top-rate taxpayer, you can claim up to an additional 25% back on your tax return, bringing your total tax relief to 45%. Scottish taxpayers can claim back up to an additional 26% on their tax return, potentially bringing their total tax relief to 46%.
So, once you have an idea of how much you’ll need, how do you get there? Try our retirement planning calculator below to find out how much you need to be putting away monthly in order to reach your retirement goal.
Our Retirement Planning Calculator will show you what you need to be putting aside each month in order to reach your retirement goal.
*If you need help to start, we suggest you enter at least £300,000 as your retirement goal. Researchers from Aegon report £300,000 is the amount that people need in their pot to maintain their current lifestyle in retirement.
**These growth rates options of 2% (low), 5% (medium), 8% (high) are indicative and not guaranteed.
A SIPP is managed by you, and you can view it at any time to see how your investments are performing. You have full control of how your pension pot is invested, allowing you to tailor your pension portfolio to your needs and investment preferences.
In a SIPP, you can invest in a wide range of asset classes, regions and sectors, allowing you to diversify your pension investments, whilst taking into account where other investments sit in your wider portfolio. SIPPs are easy to manage, and if you’ve had a change in your circumstances or simply a change of heart, you can alter your investments whenever you like.
Having your investments all in one place not only makes investing simpler, but it will prevent you from paying fees to multiple providers, in turn saving you money. The Selftrade SIPP has a low, annual administration fee of £118.80, meaning your fees don’t increase as your investments do.