Sipps: don’t forget your pension amid the Isa rush
Isas aren’t the only tax-efficient wrapper for your savings – you should be using your pension allowance too
Are you making full use of your pension? In common with Isas, the pension system gives you a tax-free contribution allowance each year. And if you have the means to use more of that allowance before the end of the tax year, a self-invested personal pension (Sipp) could be the way to do it.
The basic rule is that you can put up to £40,000 into a pension each tax year. Those on more than £200,000 face reduced allowances (and you can’t invest more than you earn).
Importantly, that £40,000 is an allowance across all the pension schemes you belong to, including “defined benefit” ones (which are rare these days outside the public sector – most private-sector staff have “defined contribution” pensions); it also includes any contributions your employer makes on your behalf, plus the value of the tax relief the government offers on pension savings. If you have the option of joining a pension scheme at work, it almost always makes sense to do so; otherwise, you will miss out on a contribution from your employer. But you may still have some allowance left over – and not everyone has access to an occupational or auto-enrolment pension.
The tax breaks on pensions are attractive
That’s where Sipps come in. Sipps are individual pension arrangements managed by life insurers, investment platforms and other financial services businesses. They administer the pension wrapper, inside of which you can make whatever savings and investments you see fit. The range of permissible investments for Sipps is very wide – everything from stockmarket and bond funds to commercial property.
Moreover, whatever you choose to invest, you qualify for the same upfront tax breaks on your pension contributions. It costs basic-, higher- and additional-rate taxpayers £800, £600 and £550 respectively to contribute £1,000. Like other pensions, Sipps must be left untouched until you reach at least age 55 (this minimum age is set to rise to 57 in 2028). From then on, you can take up to 25% of the fund as tax-free cash; the remainder can be converted into guaranteed income via an annuity, or you can make direct withdrawals from the pot via “drawdown”.
While there are dozens of Sipp providers to choose from, there are several ways to narrow down the choice. First, what kind of investments do you want to make inside your pension plan? Some Sipp providers offer super-cheap products, but only provide a limited choice of investment fund, typically their own ranges – Vanguard is a good example. Others offer more choice – essentially any fund you could buy within an Isa. And there are also “full Sipps”, offered by specialist providers, which allow some of the more exotic investment options; this might be useful if, for example, you’re thinking about using Sipps to invest in business property, including the premises your own business uses.
How to choose a Sipp provider
The next issue to consider is costs. Here, you need to be smart, because there are a number of different charges to pay on Sipps, and providers levy them in different ways. First, there’s the administration fee for the Sipp wrapper itself. It might be a percentage applied to the value of all your savings – say 1% a year, or it might be a fixed cash charge – say £250 a year. On smaller pensions, percentage fees work out cheaper than fixed cash amounts.
Next, look at dealing fees. These typically vary according to what you’re investing in, so compare providers carefully on the basis of how you’ll allocate your money – and how often you’ll change your investments. And remember that if you’re investing in funds rather than individual shares, managers of these will have their own fees, although some providers have negotiated discounted rates with select managers. Also, consider any other charges that might catch you out. Transfer fees, in particular, are best avoided. This is what a Sipp provider will charge if you want to move your pension elsewhere.
The final piece in the jigsaw as you choose a Sipp is service. What do you need from a provider in terms of support and experience? Some Sipp providers, for example, offer comprehensive online research facilities that can help you to make more informed investment decisions. Others offer mobile apps and digital functionality that may be important to you.
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