A Self Invested Personal Pension, aka a SIPP, is a type of pension that gives you control over how you would like to invest your pension savings. Whether that be stocks, funds, bonds or ETFs, the range of choice will be dependant on the SIPP provider you choose. Popular SIPP providers include AJ Bell, Hargreaves Lansdown and the new, app-based PensionBee.
What are the benefits of a SIPP?
Do you know how each of your pension plans is performing? Do you know how much each of your pension plans is charging you for managing the funds they have invested your pension in? I would be surprised if you are able to answer with an emphatic “yes” to both of these questions. My current workplace pension provider, for example, does not do a good job of making it easy to get hold of either of these figures. However, these really are things we, as pension contributors, should know.
There are potentially some cost savings to be made by transferring existing pension pots into a SIPP. For example, you could invest in lower-cost funds that might be performing just as well or better than the actively-managed funds that your existing pension plans are likely invested in. A good example of a low-cost, strong performing fund that can be invested in as part of a SIPP is this UBS S&P 500 Index.
Furthermore, if your current pension plans are under-performing, and your existing provider doesn’t have a wide range of alternative fund options, then you should consider transferring to a SIPP like that offered by Hargreaves Lansdown who offer a broad range of investment options.
How to combine pensions?
Perhaps, like me, you have worked for numerous employers over the course of your career and have several different pension pots across different pension providers? Whilst it is always smart to opt into your workplace pension to benefit from your employer’s contributions, it can be difficult to keep track of lots of different pots. As the number of pension pots you hold increases, as too does the likelihood that you will forget about one of them. Note that you are not able to take money out of your pension until you reach 55! A SIPP can be a good means of consolidating your various pension plans and thus eradicate such a risk.
The process for transferring existing plans into a SIPP is, in my experience (using Hargreaves Lansdown), a straightforward one. I have heard that PensionBee, in particular, make this a painless experience. For example, in the event that you have forgotten which particular pension provider your previous workplace pensions were held with (Aviva, Aegon, Legal&General, etc), PensionBee need only the name and of your previous employers.
SIPP Tax Relief
Just like workplace pension, your SIPP contributions are subject to tax relief. With a workplace pension, your contributions are deducted from your gross (i.e. before tax) salary. However, with a SIPP your contributions are from your net (post-tax) salary, meaning the government needs to reimburse you. How much you will receive from the government will be dependant on what rate of taxpayer you are, e.g. basic rate taxpayers will receive back 20% of their contribution. In my experience with my HL SIPP, this tax relief is automatically paid into my SIPP a month or so after each contribution that I make (paid via direct debit).
Can I contribute to a SIPP whilst also opting into my workplace pension?
Yes, you can and it may be a very good idea to do so since it is rare for an employer to match your contributions beyond 5% and, as previously mentioned, your workplace pension might not be the best place to invest your pension savings beyond that. If you earn less than £150,000 then your annual pension allowance is £40,000 (please note that this includes workplace and employer contributions), and it makes sense to use as much of this allowance as is as affordable for you. This is particularly the case if you are a higher rate taxpayer since you can get tax relief at 40%.
Earn more than £150,000 and/or are interested in contributing more than £40,000 a year to your pension? Beware of reductions to your pensions allow and charges. The Pensions Advisory Service covers this in detail here.
Disclaimer: This post is for information purposes only. Whilst everything has been carefully researched and I believe it to be factually correct, I am not a Financial Advisor.