Personal Pension

Saving tax-efficiently for retirement

A personal pension is a type of defined contribution pension. You choose the provider and make arrangements for your contributions to be paid. If you haven’t got a workplace pension, getting a personal pension could be a good way of saving for retirement.

Your pension provider will claim tax relief at the basic rate and add it to your pension pot. If you’re a higher-rate taxpayer, you’ll need to claim the additional rebate through your tax return. You also choose where you want your contributions to be invested from a range of funds offered by your provider.

Your pension pot builds up in line with the contributions you make, investment returns and tax relief. The fund is usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. You can usually choose from a range of funds to invest in.

When you retire, the size of your pension pot will depend on:

• How much you pay into your pension pot
• How long you save for
• How much, if anything, your employer pays in
• How well your investments have performed
• What charges have been taken out of your pot by your pension provider

Following changes introduced in April 2015, you now have more choice and flexibility than ever before over how and when you can take money from your pension pot.

Self-Invested Personal Pensions

Providing greater flexibility with the investments you can choose

A self-invested personal pension (SIPP) is a pension ‘wrapper’ that holds investments until you retire and start to draw a retirement income. It is a type of personal pension and works in a similar way to a standard personal pension. The main difference is that with a SIPP, you have greater flexibility with the investments you can choose.

With standard personal pension schemes, your investments are managed for you within the pooled fund you have chosen. A SIPP is a form of personal pension that gives you the freedom to choose and manage your own investments. Another option is to pay an authorised investment manager to make the decisions for you.

SIPPs are designed for people who want to manage their own fund by dealing with, and switching, their investments when they want to. SIPPs can have higher charges than other personal pensions or stakeholder pensions. For these reasons, SIPPs tend to be more suitable for large funds and for people who are experienced in investing.

Most SIPPs allow you to select from a range of assets in which to invest, including:

• Individual stocks and shares quoted on a recognised UK or overseas stock exchange
• Government securities
• Unit trusts
• Investment trusts
• Insurance company funds
• Traded endowment policies
• Deposit accounts with banks and building societies
• Some National Savings and Investment products
• Commercial property (such as offices, shops or factory premises)

These aren’t all of the investment options that are available – different SIPP providers offer different investment options.

Residential property can’t be held directly in a SIPP with the tax advantages that usually accompany pension investments. But, subject to some restrictions (including on personal use), residential property can be held in a SIPP through certain types of collective investments, such as real estate investment trusts, without losing the tax advantages. Not all SIPP providers accept this type of investment, though.

• You are not restricted to pension funds offered by any single pension provider, but instead can invest in a broad range of investments from a range of different providers
• Your returns from investments within a SIPP are protected from Income Tax and Capital Gains Tax
• You’ll receive tax relief at your marginal rate on an Annual Allowance, which for most people is £40,000 or 100% of your earnings – whichever is lower
• You can choose from a wide range of options when you take your pension benefits, including a cash lump sum, a flexible or guaranteed income – or you can combine multiple options

Pension freedoms introduced in April 2015 mean you can access and use your pension pot in any way you wish from age 55. However, SIPPs aren’t appropriate for everyone, and you should seek professional advice if you are considering this option.

A SIPP will only be right for you if you’re confident making your own investment decisions and managing your pension payments against the relevant allowances.