Transferring your pension to a SIPP gives you more control
The tax advantages you get by investing in a self-invested personal pension, or SIPP, are the same as in all pensions. If you are a basic rate taxpayer and you are putting away £200 a month, or £2400 a year into your SIPP, the government will add £600 for that year. You can think of this as an automatic 25% bonus. Higher-rate taxpayers can claim a further £1000, raising their £2400 contribution to £4000. That’s a big incentive to save.
A SIPP isn’t necessarily a replacement for a workplace pension, particularly when your employer is making contributions alongside you. But we now, on average, change jobs ten times in our careers, 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 are still paying for, they can be transferred to your SIPP and brought under one roof, where you control the investment strategy.
As you approach your retirement and think about how to fund it, your strategy is likely to change, and a SIPP gives you the flexibility to respond.
After age 55, pension freedoms mean you can convert your SIPP to drawdown. That enables you to tap your fund for taxable income or lump sums, and withdraw 25% tax-free if you wish, whilst keeping the fund invested.
Another attraction is that if you fail to reach 75, your SIPP will pass to your beneficiaries, tax-free. If you die age 75 or older, it becomes part of their taxable income.
You can transfer your old UK pensions to a SIPP if you live overseas, though you may not be able to make new contributions.
A SIPP gives you more choice
The wide investment choice in SIPPs can make a significant difference to the performance of your pension, and therefore your retirement.
You may currently have several old pension funds, all with a similar investment strategy. That strategy may be tied closely to the performance of the FTSE 100, which may expose you to more risk than necessary, particularly if you are nearing retirement. Or they may be invested over-cautiously.
Where traditional personal pensions do have enough funds on offer, charges for switching funds can be steep, particularly on older policies. Stakeholder plans have lower charges, but a more limited fund choice. Newer pension brands may offer a small menu of generic funds.
A SIPP on the other hand can be invested in a huge range of shares, bonds, funds, investment trusts, or exchange traded funds (ETFs), and it allows you to choose investments you understand and are comfortable with. You can hold whatever you like in cash until you are ready to invest it.
You may have to do some homework on SIPP investing basics and learn as you go along, but your pension is a long-term investment, giving you time to ride out the market’s ups and downs. By following basic principles such as diversification and phased buying, your SIPP should grow.
Benefit from reduced costs when you transfer to a SIPP
Pension charges can also have a large effect on your retirement fund, though the differences can sound small. Many pensions levy fund management charges not justified by their performance. Transferring to a SIPP is a chance to examine the option of passive investing via an ETF or a tracker fund, which is likely to be much cheaper.
Many older personal pensions have high costs and hidden charges, giving a big incentive to transfer. But they may also have penalties for leaving, sometimes in the form of a big bonus paid only at the end of the contract.
Many providers, however, allow free transfers out, and there should not be a set-up charge for the new SIPP. Today’s market has fair-charging SIPPs combining wide investment choice with some research tools, and some may even offer incentives to switch. Transferring is straightforward — choose your provider and they will activate all the paperwork.
Charges can be hard to compare. The amount you pay depends on the type of SIPP, the investments you choose and your level of trading.
For larger funds, flat or capped charges are best, while smaller funds will run faster on low percentage-based fees. Check carefully what you will pay for initial and annual charges on funds, the trading costs on investment trusts, ETFs and shares, and any other services such as automatic reinvestment of dividend income.
Use our pension calculator to see how much you could need in the future, and whether you’re saving enough to meet your financial targets.