What is a SIPP?
SIPPs have become a better way to save for retirement in recent years. In 2023, SIPPs had assets of more than £205 billion and more than 1.7 million people were using a personal pension.
Simply put, a SIPP allows you to save, invest and earn more income before retirement. Although it works in a similar way to a traditional superannuation account, self-directed investing offers greater flexibility and control over the types of investments you can choose to add to your savings.
While SIPPs are a popular choice among those with experience in investing, they’re becoming more commonplace among self-employed individuals who don’t have a typical workplace pension and those keen to invest alongside their workplace pensions.
So, how can you make SIPPs work to your advantage? Let’s take a look at three quick tips that can help you build wealth with the help of a Self-Invested Personal Pension:
1. Track and consolidate your existing pensions
The average adult in the UK will hold nine jobs in their lifetime, and this will often mean a lot of different pensions created with lots of different providers.
This means that if you’ve had multiple employers in the past, you may have multiple pensions that are difficult to locate and utilise to their full potential.
By combining your pensions into a SIPP that suits your risk tolerance and financial goals, you can rescue your funds from the ether and really get them to work for you.
With this in mind, the first quick tip to build your wealth with a SIPP is to consolidate your pensions. But how can you find them?
Discovering your old pensions can be tedious, especially if you’ve been working for many years. If you don’t know your old providers, then there are resources like the government’s Pension Tracking Service that can help you locate your old pensions.
Once you find your providers, it’s much easier to trace a pension to add to your SIPP. Typically, your provider will post annual statements to you, and this is usually the case even when you no longer pay into a personal pension. These documents will have your policy number, which you can use to track and consolidate your pensions.
If you can’t find a statement, you’re likely to be able to access your pension by answering some personal and security questions from your provider.
2. Stagger your tax-free cash
One of the best features of pensions is that you’re able to withdraw 25% of your total funds tax-free when you reach retirement age, up to a maximum of £268,275. This means that when you turn 55 (soon to be 57 following retirement age changes from 2028) you’ll be able to access your savings.
However, to preserve your investment growth, you can use a SIPP to adopt a more staggered approach and withdraw your tax-free cash in stages.
This means that you won’t have to commit to either a drawdown or an annuity, and you can retain a higher proportion of your savings to ensure that the amount you have available to withdraw tax-free will increase over time.
In addition to this, any pensions you haven’t drawn remain exempt from inheritance tax, unlike the money in your bank account.
3. Flexibility to avoid value traps
The added control that you’re afforded when using Self-Invested Personal Pensions can be a great way of managing the types of investments you’re making ahead of your retirement.
Because SIPPs are long-term focused, you can arrange your investments to focus solely on assets like stocks and shares that have historically demonstrated significant long-term outperformance, as opposed to falling into the temptation to buy into a stock that’s on a roll through a different investment strategy.
Equity instruments can be dangerous for investors looking for short-term gains, so using a SIPP can be a way to keep a more positive outlook by helping to protect risk assets.
Whether you plan to manage your SIPP and its assets yourself or work with a financial advisor, this approach can be very useful in resisting the temptation to buy short.
Taking control of your retirement pot
The reason why SIPPs are growing in popularity is that they offer a flexible way to manage your money as you save for retirement.
But unlike workplace pensions, which often underperform in the formula, with a SIPP you can pursue a wide range of investments tailored to your specific purpose.
If you have the time and knowledge to factor in your retirement planning, these quick tips could be a great way to save money and build a nest egg for the future.
