How to build your own ‘pot for life’ pension with a SIPP

Saving for a dream retirement? You’re probably already contributing to your workplace pension scheme. But what happens when you move jobs? Or choose to go self-employed? That money isn’t lost, but it can become harder to keep track of.

This is where self-invested personal pensions (SIPPs) can be extremely useful for keeping you in control of your retirement savings. A SIPP is essentially your pension ‘pot for life’, regardless of how your employment status changes.

The previous government’s plan to let employees choose their own workplace pension scheme that follows them as they move up the career ladder and change jobs have been kicked into the long grass.

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Their “pot for life” idea was that the employee, rather than their employer, chooses the pension scheme that contributions go into, giving savers more freedom over how their pension is invested. It was also meant to make it easier to keep track of your money, rather than being left with a variety of pots each time you get a new job.

Many of these perks already exist if you combine old workplace pensions into a private pension or a SIPP.

This can be set up either through a financial adviser or with a DIY investing platform.

Many savers are already transferring old workplace schemes into SIPPS. Combining your pensions to reduce charges could boost your pension pot by over £7,000 after 10 years, according to calculations by wealth platform AJ Bell.

We explore the considerations to make when choosing between a workplace pension or SIPP in a separate guide.

James Floyd, managing director of SIPP platform Alltrust, says SIPPs offer a number of advantages for savers who want to keep tighter reins on their retirement savings.

“The inherent flexibility of a SIPP allows for contributions to be adjusted according to an individual's financial capacity. As income increases or when surplus funds become available, individuals can readily increase their contributions to their SIPP, accelerating the growth of their retirement pot,” he points out.

“For those who have accumulated multiple smaller pension pots over their working lives, a SIPP also offers the opportunity to consolidate these into a single account,” Floyd adds.

“This consolidation can lead to a larger overall fund that benefits from unified investment management and potential economies of scale, ultimately helping individuals build a more substantial retirement nest egg.”

Also, unlike some pension schemes with more restricted investment choices, SIPPs allow individuals to allocate their funds to asset classes. This could include ones that have historically demonstrated the potential to outpace inflation over the long term, for example, commercial property.

When it finally comes to hitting retirement and making withdrawals, SIPPs allow retirees to choose between a number of methods of accessing their funds, depending on which is most convenient for them.

This includes taking a regular income through pension drawdown, withdrawing ad-hoc lump sums as and when needed, or using a portion of their SIPP to purchase a lifetime annuity that provides a guaranteed income stream.

“This flexibility enables retirees to create a personalised and adaptable retirement income strategy that can be adjusted to meet their changing financial needs and potentially optimise their tax efficiency during their retirement years,” says Floyd.

Here is what to consider when selecting a SIPP.

Watch out for fund and platform fees

Investment platforms will charge you for holding your portfolio and there will also be fund and trading costs.

Some will charge a percentage fee based on the value of your holdings while others will charge flat fees, which may be better if you have a larger pot.

You should also check trading costs though as these differ among platforms so if you plan to rebalance your portfolio regularly, it may be worth opting for a provider where there are low or zero fees for buying and selling funds and shares.

“Consider the annual ongoing costs for any funds you invest in and the exit fee, if there is one, if you plan to move your pension to a different provider,” says Alice Haine, personal finance analyst at Bestinvest.

“There can also be ad hoc costs such as income drawdown charges with some providers, so check those too. When analysing older plans, you may find them pretty expensive, which is why scooping them together into one pot can be more cost-effective.”

Get paid to switch

Platforms may offer cashback or other transfer offers and perks to move your pension or open a SIPP and there may even be rewards for referring a friend.

For example, Hargreaves Lansdown is currently offering 40% off your account charge for up to six months when you transfer to a new HL Self-Invested Personal Pension.

Investment choice

Not all investment platforms are the same and may have a different range of funds and shares.

Check if a platform's fund range reflects your investment strategy such as if you want sustainable or ESG products.

“Look for any added extras a platform offers, such as the option to invest in ready-made portfolios – off-the-shelf fully-managed investment portfolios where investment experts do the hard work for you by building a diversified portfolio of investments at a relatively low cost that is tailored to different risk levels,” adds Haine.

Investment tools

Providers may offer different levels of support such as research tools and best buy fund lists, which may be helpful depending how experienced you are and how much help you need.

Some may even offer access to financial advisers or portfolio health checks.

“Those looking for their first SIPP should consider whether the range of investment choice suits their needs, the help provided choosing investments, the service including access to manage a pension through app, website and telephone support, plus access to wider investment accounts such as ISA, and cost,” says Clare Stinton, head of workplace savings at Hargreaves Lansdown.

Becky O’Connor, director of public affairs at PensionBee, suggests looking at recommendations, reviews and industry ratings.

Investment platform ratings can be found through websites such as Defaqto and Boring Money.

“If you value good customer service and being able to speak to someone easily about your pension, you might prefer a personal pension provider that scores highly in reviews and independent ratings for good service,” adds O’Connor.

“If digital accessibility is important for you, for example, you want to be able to log in to your pension using an app rather than having to log in online, then pick a provider that is rated highly for its app functionality.

“Having access to information and guides might be really important to you to help you remain feeling in control of your pension, in which case, providers that offer a lot of helpful and relevant content could be best.”

Should you transfer your pension?

Transferring your pension won’t be right for everyone, especially if there are certain benefits in your existing scheme.

“Older pensions taken out before April 2006 include an option to take more than 25% as a tax-free cash lump sum,” adds Guy.

“Other older plans can come with guaranteed annuity rates (GARs) that are higher than those currently available on the annuity market. So, there’s some weighing up to do.”

Haine adds that you should also check if your employer would be happy to contribute to a SIPP.