6 reasons to have a SIPP this tax year

Pension planning is an unavoidable reality for most of us under the age of 65.

But, the UK is currently facing a pension crisis. The official retirement age is rising and only around half of adults under the State Pension age are saving into a private pension. But, with the current global economic uncertainty affecting our financial futures and we begin a new tax year, now could be a more important time than ever to start your pension planning – whatever your age.

Having a SIPP (Self-Invested Personal Pension) lets you save for retirement on your own terms. It gives you greater freedom and flexibility when investing in your pension that isn’t available from a standard pension fund.

We look into six reasons why we think 2020/21 could be a good time to start your SIPP.

Remember this article is not personal advice, if you are unsure of the suitability of an investment for your circumstances seek advice. Tax rules can change, and benefits depend on your circumstances. Normally you can only access a pension from age 55 (57 in 2028).

1. The State Pension is not enough

Recent research states that the average pensioner needs an income of at least £20, 000 per year to have a ‘comfortable retirement.’ But, the full new state pension for 2020/21 is only £175.20 per week or £9,110 per year. This might leave a huge gap between what people will need in later life versus what they might have.

We are also generally living longer and longer. So the age you can claim the State Pension is increasing. Under the current timetable, the State Pension age is due to rise to 67 by 2028 and 68 by 2046. This means you’re likely to need even more money to see you through retirement, or retire later than you might have envisioned. To calculate when you’ll reach State Pension age and how much you may get you can use the government calculator.

Putting any extra money you can afford into a personal pension, might help prevent the unwanted shock of reaching retirement age without enough income to fulfil your needs.

2. Investment choice

Many pensions have a narrow range of investment options or the investments are chosen and managed on your behalf by the pension fund manager. This service would not be personal advice as the pension fund manager is investing on behalf of many other people, all with different expectations, interests, attitudes to risk and income requirements.

But, if you’re looking to maximise the range of possible investments and take control of your own retirement, a SIPP might be worth considering.

The HL SIPP gives you freedom and control over your investment decisions and you can access a huge range of investments. You choose where and when to invest your money.

This doesn’t mean you have to keep constant tabs on your money or contribute a huge amount. You can set up a Direct Debit from just £25 per month or pay one-off lump sums of £100 into an HL SIPP. You also only need to check in on your SIPP from time to time to make sure that you’re still happy with your portfolio.

More about the HL SIPP

3. Pension freedoms

Since pensions freedoms were introduced in April 2015, many people have seen the benefit of moving into a pension that makes the most of the greater flexibility offered.

From your 55th birthday, you can withdraw as little or as much as you like, whenever suits you. You can withdraw up to 25% tax free from your SIPP as a lump sum. Anything you withdraw after this will be subject to income tax. Or, you can take withdrawals gradually throughout your retirement, with 25% of each withdrawal usually being tax free.

Remember, tax laws can change and any benefits depend on individual circumstances.

More about tax

4. You’re self-employed or run your own business

It’s estimated that over five million people in the UK are self-employed. But, in 2018 only 31% were thought to be saving anything into a pension. For sole traders and limited company owners, a private pension not only helps you save for your retirement, it can help save tax too.

Being your own boss means saving for retirement is your responsibility. Adding money to a private pension can help make sure the independence you enjoy continues, whenever you decide to stop working.

Plus, you can set up monthly direct debt payments from as little as £25 into the HL SIPP, which means you don’t have to worry about remembering to pay into your pension.

More about paying into a pension

5. Tax relief

Investing through any pension scheme can be very attractive because of the tax breaks. Income tax relief is available on pension contributions – this can help increase the amount of income you could get in retirement.

If you’re a UK resident under the age of 75, you can normally add money to a pension and get tax relief. To receive tax relief on your personal contributions, you can only top up as much as you earn each tax year, or £3,600, whichever is greater. There’s also an annual allowance (£40,000 for most people) that limits the amount that you can contribute each year to pensions without incurring a tax charge.

In this tax year, you can receive up to 46% tax relief when you make a personal contribution to a pension, such as a SIPP. Basic rate tax relief (currently 20%) is paid by HMRC to your pension and any further tax relief is reclaimable from HMRC. For example, if you put £8,000 in your pension, the government will add an extra £2,000, bringing the total amount to £10,000. If you pay tax at a higher rate, you could claim back up to a further £2,600.

Please note that the 46% rate of tax relief is only available to Scottish taxpayers. The maximum rate of tax relief for the rest of the UK is 45%. You must pay sufficient tax at the higher rates to claim back the full amount.

Find out more on tax relief

6. Seeing your investments under one roof

Having a SIPP can put you in control of your investments and your retirement, and having all your pensions in one place can make it easier to see what you’re doing with your money.

We can change jobs often throughout our careers, possibly leaving each pension abandoned behind us. Contributions stop, but charges don’t, and they can be damaging.

Instead of losing track of old, dormant funds you’re still paying for, they can be transferred to your HL SIPP and brought under one roof. Remember to check if there are excessive exit fees or valuable benefits, you might lose if you transfer.

Remember, when transferring a pension to the HL SIPP, unless otherwise arranged, your existing provider will sell any investments and transfer the cash proceeds. When you transfer as cash, you will be out of the market and miss any rises or falls for a period.

For many this is the quickest and easiest way to transfer – most are transferred electronically, taking just eight working days on average. However, if the pension you are transferring is another SIPP or SSAS you may be able to transfer the investments without them being sold.

The uncertainty we are currently facing, might be a good opportunity to get all your money together so that you can formulate a plan.

Plus if you transfer to HL before 30 April, you could receive cashback.

More on transferring

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