Self Invested Personal Pension
Introducing Self Invested Personal Pensions
We write this article from an expat perspective, should you be a UK resident again then i would suggest speaking to us as many factors change.
A pension, in our opinion, is the best way to save for your retirement. When you paid into a pension, you received a boost from the government. It’s one of the most generous tax perks available and the main reason why people put money in a pension in the first place.
A Self-Invested Personal Pension, or SIPP, is a type of pension that lets you choose all your own investments. The SIPP makes it easy for you to manage your pension. You can see how it’s doing online at any time, making changes whenever you like. That way you can breathe life into your pension, and ultimately determine how you enjoy your retirement.
A SIPP gives you access to the very best fund managers, and more.
Investing in Funds
To really boost the size of your pension, it’s worth considering investing it in the stock market. Funds are one of the most popular ways to do this and a SIPP gives you access to the very best fund managers.
What is a fund?
A fund is a collection of investments, chosen and run by a fund manager. Each fund manager has an objective, for example to grow your capital, or provide a decent income. When you invest in a fund, you’re buying a slice of the fund’s investments.
Funds can be invested in many different types of asset, like shares, bonds and property. Some are focused on just one type, and some a mixture.
Cash V The Stock Market
Interest rates on cash savings are currently low, but historically the stock market has delivered better returns. And because pensions are designed for long-term investing, you’ve usually got time to ride out any short-term falls to end up with overall growth. However, unlike the security offered by cash, there are additional risks with investing and ultimately the value of investments and income can fall as well as rise so could get back less than you invest.
When it comes to choosing investments, there’s no rush to make decisions. You can hold cash in your SIPP while you decide where to invest, safe in the knowledge you’ve received tax relief on your pension contribution. But remember that with little growth potential, cash isn’t likely to meet your needs over the long term.
A share represents part ownership of a company. When you buy shares you literally own a ‘share’ of the business. You can buy and hold shares in your SIPP, along with other investments.
Bonds are loans to companies and governments. They’re listed on the stock exchange and trade like shares.
Investment trusts are similar to funds, but they’re listed as companies on the London Stock Exchange, so they trade like shares.
Exchange Traded Funds (ETFS)
ETFs are a type of fund that tracks a stock market or commodity. Even though they’re funds, ETFs are listed investments, so they trade like shares.
If you don’t want to invest straight away, you can also hold cash in your SIPP.
Your Retirement Options
As you approach your retirement, your investment strategy is likely to change depending on how you plan to use your pension. This may mean moving into less risky investments. Or it could mean choosing investments that produce an income, especially if you’d like to use the income for your retirement through drawdown. A SIPP gives you the flexibility to manage this transition as you see fit.
Withdrawing money from the SIPP
You have more freedom than ever when deciding how to take money from your pension. With a SIPP you can normally start taking your pension money from age 55 (57 from 2028). You can usually take up to 25% tax free, and any further withdrawals are taxed as income. However, there is no requirement to take money from your pension at all, if you’d rather keep it invested.
You have three main options for living off your SIPP in your retirement, plus you can choose a mix of the options to match your needs. It’s an important decision, so it’s good to understand the options fully so you can choose what’s right for you. If you’re not sure, book an appointment with us and we can advise you accordingly.
You can use all, or some, of the money in your pension pot to buy an annuity. An annuity pays you a guaranteed income for life, no matter how long you live. You can choose whether your annuity income stays the same throughout your retirement, increases by a fixed percentage each year, or increases with inflation.
The majority of people qualify for an enhanced annuity, which means they get a higher income by confirming details about their health and lifestyle. It’s easy to do and could mean you receive significantly more income over your lifetime.
Your annuity can continue to pay your spouse or partner after you die (joint life annuity) or the annuity can stop (single life annuity). You can also guarantee your annuity for a period of five, ten or even 30 years. This means if you die within this time period, the income will continue to be paid to your estate, or to your beneficiaries, throughout the guarantee period.
There’s even a money back option called value protection. If you choose an annuity with this option, you or your beneficiaries are guaranteed to get your money back, less any tax. It’s worth noting that once you’ve set up your annuity, you usually can’t change the options you selected, even if your health changes. We can search the whole market for the best annuity rate and help you understand your options.
Drawdown is a higher-risk option than an annuity. It lets you take your tax-free cash (usually up to 25%) and leave the rest of your pension invested, taking money directly from your pension as and when you need it.
You choose where to invest your drawdown pot and the value will rise and fall depending on how your investments perform. You can choose how much money you take (from nothing to the whole pot), with your withdrawals being taxed.
Drawdown death benefits are more flexible than with an annuity. That’s because your drawdown account can be inherited by your beneficiaries. Beneficiaries can normally then make tax-free withdrawals from your pot if you die before age 75. If you die after age 75, their withdrawals will be subject to income tax. Pensions aren’t usually subject to inheritance tax.
With this increased flexibility comes increased risk. Your income isn’t secure, so if your investments don’t perform well or if you withdraw too much money, your pension’s value could fall and you could even run out of money altogether. You’ll need to be confident that your investment and income choices mean your pension can last you throughout your retirement.
Take Lump Sums Directly
This option is called Uncrystallised Funds Pension Lump Sums (UFPLS). It lets you take money directly from your SIPP without having to choose drawdown. Each time you take money out, 25% of it will usually be tax-free and the rest taxed as income. The rest of your pension stays invested, and while this creates the potential for growth, it also means your pension value isn’t secure. Deciding whether to withdraw money over time or all at once is an important decision and can affect the amount of tax you pay.
Mix and Match
You don’t have to make a single choice from the three options above. You could choose a mixture instead. For example, you could use some of your pension to cover essential living costs through an annuity, and use the rest to provide a flexible income with drawdown.
What happens to your SIPP when you die?
When you die, your SIPP can be passed to your beneficiaries, in most cases free from inheritance tax.
If you die before you’re 75, your beneficiaries can normally withdraw what they like from your pension without paying tax.
If you die age 75 or older, withdrawals will be taxed as the beneficiary’s income.
Is a SIPP the right pension for you?
A SIPP is just one type of pension for you to consider. You might not need or want the wide investment choice that a SIPP offers. Or, you may already have a good pension already. The first thing to check as a US connected expat is whether your current pension provider will 1. Let you keep the policy until retirement, 2. Allow you to access your pension from 55 as many do not allow any form of drawdown in retirement.
Most pension plans are provided by insurance companies, whose funds don’t always have good performance records. If you’d like to be able to invest with the best fund managers in the market, a SIPP may be a better choice.
If you choose a SIPP, you should have the desire and confidence to make your investment decisions with your adviser. If you’re not sure if a SIPP is right for you, ask for advice to help you with your decision.
Starting a SIPP
It’s possible to transfer old pensions to a SIPP, or you can start one with new contributions if you are a UK tax payer.
Transferring old frozen pensions into a SIPP
People regularly change their insurance or mortgage provider in order to secure the best deals. But not many people take the same trouble with their pension. Some older personal pensions have high fees and may suffer from poor investment performance. Transferring can mean a move away from outdated arrangements, not to mention the benefit of having all your pensions in one place.
It doesn’t matter how old you are, you’re free to transfer your pensions to a SIPP. You can also transfer your old UK pensions to a SIPP if you live overseas, but you may not be able to make new contributions.
Transferring isn't difficult it's just a lengthy process made difficult by stuffy UK Pension institutions who haven't updated their procedures to that of the 21st century.
Things to consider before transferring
While transferring itself is usually free, your current provider might charge exit fees. Make sure to check you won’t lose money, or a valuable guaranteed benefit by transferring. Pensions are usually transferred as cash, unless you request otherwise. This means that during the transfer your money won’t be invested. That can work in your favour if the market falls, but if it rises you won’t benefit.
Tax on the SIPP as an Expat
If you are a (or were) a UK national at some point in your life before moving to the US the tax implications of having a SIPP are fairly easy to understand. We have written a separate guide on tax which can be found here. Otherwise it would be best to schedule a quick call to run through this and discuss the SIPP in more depth. The call is free and you are not under any obligation; we do not apply any form of sales tactics whatsoever.