Should you open a SIPP? A self-invested personal pension (SIPP) may be a good way for you to save for your retirement. But for many people, it is not clear whether they need a SIPP or not. The benefits of a SIPP versus its drawbacks are also often not clear.
Saving for your pension is important but the unclarity surrounding it makes this more difficult than necessary. Currently, 35% of the adult population in the UK does not have a pension. While money issues certainly play a role, the lack of education is also to blame.
Monethalia does not offer financial advice. Should you take any action based on the information provided, Monethalia will not be liable for the outcome.
Table of Contents
Why you need to open a SIPP
What is a SIPP?
A SIPP is a do-it-yourself pension. This means you have full control over where you keep your money or what fund it is invested in. You are the fund manager, rather than a pension management company, which also means you have full responsibility for the outcome.
You can pay into your SIPP as and when you like. The government will then add 20% tax-relief (or even more if you are a high-rate taxpayer). This means you will get a little extra boost for your savings. At age 55 (this will change to 57 in 2028), you can then draw an income from your SIPP.
From your SIPP, you can then take 25% of the total amount as a tax-free lump sum. The remainder can be withdrawn as a taxable income or you can leave it in your fund to continue to grow. Another option is to buy an annuity, which will provide you with a retirement income.
Who needs a SIPP?
There are different reasons why you may need a SIPP:
- You have a lot of different pension pots and want to combine them for easier management
- Your workplace pension is with a pension provider you do not like or you have no workplace pension and want to do something for your retirement.
- The choice of funds of your other pensions is limited and you want to invest in a more balanced fund.
- You want to cut down fees to have more from your investment.
Most people would benefit from opening a SIPP. However, the biggest hurdles to this are knowledge and time. Many people are too busy with their lives to have time to learn about SIPPs. Knowledge is required to open a SIPP and invest in the right funds.
Having to make the right investment choices is the main roadblock. People also overestimate the difficulty and time required for ongoing management.
Initially, it may take some time to understand the concept and find out which fund is right for you. But after a short period of research, even ordinary people without a finance background can manage their own SIPP.
Advantages and disadvantages of a SIPP
The advantages of a SIPP are:
- Your investments are under your control. You can increase or decrease the risk as you see fit.
- Most SIPPs are cheaper than traditional pension schemes. This gives you the possibility to save a ton of fees.
- Your money is in one place rather than spread over many different accounts.
- You receive tax relief.
- Having savings is important for many reasons.
The disadvantage of a SIPP are:
- You are responsible for the investment. Thus, if you mess up, you may be left with nothing.
- It will take some time and effort to understand your SIPP and investment choices.
- If you are already nearing retirement age, setting up a SIPP may not be worth it.
- The money is locked away until you are at a certain age.
- Regulations may change.
How to open a Sipp
Opening a SIPP is a multi-step process:
- Understand the concept of SIPP
- Find a fund you would like to invest in
- Compare different SIPP providers
- Open your account and pay in/transfer money
As step 1 is already covered above, you can start with step 2. There is a huge variety of funds on the market but many are too obscure to be a solid option. You can also split your money over different funds for more diversity.
In general, index trackers are already diversified enough so that you should only need one fund. However, this depends on personal preference. Two popular funds you may wish to consider are:
- Vanguard LifeStrategy 80% Equity
- Vanguard FTSE Global All Cap Index Fund – Accumulation
This does not mean any of these funds is right for you though. You should always do your own research before investing.
When looking for a SIPP provider, the most important factor is the cost. Generally, you pay to sets of fees: platform fees and fund fees. You want these to be as low as possible to make the maximum amount of money.
You can compare fees here.
Why you need to open a SIPP summary
SIPPs are a great way to save money for your retirement. This is especially true if you do not have any other pension or your workplace pension provider has poor fund choices or high fees.
SIPPs require some knowledge about investing which may scare off people. However, after a bit of research, everyone should be able to set-up and manage their own funds. If you are new to investing, you may want to read my guide on how to invest with confidence as a beginner.
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