SIPP or Pension Scheme?
Making provision for the infirmity of old age is a good idea, and the earlier you start the better. Sometimes you have a non-contributory pension in your job, sometimes not. If you have a pension as a benefit be sure to look carefully into it to see what it may pay out at retirement. No point in finding out too late that it is pitiful.
As an individual there are two key methods of saving for your retirement, ISAs (Individual Savings Accounts) and a SIPP Pension (Self Invested Personal Pension). I will highlight some of the differences albeit in simplified form, as particularly with regulated pensions the intricacies are formidable.
Individual Savings Accounts (ISAs)
There are two kinds of ISA for savings being a Cash ISA and a Stocks & Shares ISA. ISAs are simple to understand and run and are well worth having. At this juncture the maximum per year you can have invest in ISAs is £11,520.
Cash ISA – Currently you can have £5,760 invested into a Cash ISA. A Cash ISA is invested into a cash savings account. You will get the going rate for a cash deposit. You must be aware of the rate of inflation. You need a new one every year.
Stocks & Shares ISA – You can currently invest a maximum of £11,520 into one of these, with a new one every year. These can be invested into most stock market securities.
General features for both types are that the holdings are not liable to tax. In itself that is worth having. The contents of an ISA remain in your name and are your property, unlike a SIPP pension. If you want money out you can do so without any tax deducted. If you shop around you can find good deals for ISA accounts. Look to avoid administration and custody fees. Low dealing costs are imperative.
SIPP Pension (Self Invested Pension Scheme)
SIPP Pensions are complex and may not be suitable for you. The rules change regularly so you will most likely need an accountant and a lawyer to assist (especially if difficulties arise). By design a SIPP is mostly tax neutral, meaning any tax benefits you receive are mostly reversed.
A SIPP is usually contained within a trust, and the trustees own the assets (not you). They are responsible for ensuring it functions in accordance with pension regulations. They charge fees perhaps as a percentage or as a fixed sum, so over many years fees can have an adverse impact. Over say the 30 years or so the scheme is in existence these can add up to a substantial amount.
Contributions to a maximum of your earned income can be paid in and earn a tax credit of 20%. Sometimes the administrator applies a tax refund to the pension pot adding 20% to your contribution.
SIPPs can be invested into a wide range of investments and are not liable to tax whilst in the scheme. If you receive any taxed income you cannot reclaim that. Remember to invest at low cost, fees eat up portfolios.
If you have a dispute with the trustee/administrator of the scheme be aware that the funds assets are not yours. A pension scheme is not an individual so you cannot take matters up with government entities who only look after individuals. Be aware that in recent years regulators seem to be disinterested in regulating. If you were to complain to a regulator about malpractice be aware that you may well encounter the three monkeys syndrome; see nothing, hear nothing, say nothing (and do nothing). You will need an expensive lawyer to resolve matters, or just accept whatever the trustee says.
If you decide to move “your” pension to another trustee the process can be eyewateringly expensive with double management fees and additional setup costs. Sometimes you need to do this.
At age 55 you can withdraw a lump sum 25% of your pension tax free.
Between 55 and 75 you must commence the drawdown of your pension which will be in accordance with the drawdown rules.
If you are unlucky you may be compelled to have your pension assets moved to an annuity which will fix the amount of pension you receive. If interest rates are low you will not see a rise in income when interest rates rise. On the demise of the beneficiaries there is no residue to your estate with an annuity as it goes to the provider of the annuity. Unfortunate if you only last a few years.
The income you received from drawdown is taxed at your highest marginal rate. Be acutely aware of this. This is the flip side of the tax credit for contributions going in.