Six Tips to Take Control of your SIPP

With the popularity of self invested personal pensions (SIPPs) surging in recent years, so much so that 700,000 SIPPs are now sold every year*, Ed Monk, associate director for Personal Investing at Fidelity International offers six tips to get the most out of your SIPP:

1. Consolidate your pension pots together

“If you’ve worked for a number of employers over your working life, the chances are that you’ll have built up several pension pots. A SIPP can be a useful vehicle to help you consolidate all these pots into one place, making it easier to monitor and manage your pension savings.

“But before you bring your pots together be sure to read the small print – there can be costs involved when moving a pension – some policies have charges for moving pots before the retirement age you selected.”

2. Check the costs

“When it comes to finding a home for your pension savings it’s worth bearing in mind that SIPPs come with a multitude of different charging structures, so make sure your provider has a transparent and simple framework in place.

“Take the time to ensure you understand the costs involved for the services you want – always know what you are paying for as the last thing you want when it comes to your hard earned pension savings is to get stung with any nasty hidden charges.”

3. Take hold of the investment reins

“One of the biggest advantages of having a SIPP is that it gives you greater control over your savings and investments. Plan things carefully and your pension fund will not only provide a steady stream of income but you could also continue to grow your pot over time.

“The disadvantage however, is that your investments are at the mercy of the markets so protect yourself by being keeping your investment eggs in a number of different baskets by diversifying across regions and asset classes, making sure the asset allocation of your portfolio is in line with your risk appetite and retirement goals.”

4. Set aside a rainy day fund

“While a SIPP allows you to diversify your investment holdings, it’s nigh on impossible to completely protect your portfolio from market dips. This means, that there may be times that the value of your pot falls and, if you’ve begun accessing the money in your SIPP, the income you are able to draw down from it. If this happens, you may need to temporarily reduce the amount of income taken to avoid the risk of running out of money over the long term.

“A sensible strategy to avoid having to take a cut in your income or having to touch your actual investments during market dips can be to hold a cash reserve. Depending on how much income you are drawing, the cash you hold might be enough to finance between one to three years’ worth of pension income payments. If you dip into it in the lean times, you can top it back up when growth and dividends return.”

5. Take advantage of the tax relief

“When it comes to tax relief, SIPPs continue to be one of the most generous savings vehicles available so, if you are able to, it’s worth making the most of this benefit while you still can. When you pay in you will automatically receive basic-rate tax relief on your contributions. For example if you want to pay £10,000 you need to put in just £8,000, as £2,000 will be claimed from the tax man and added to your pension. Higher rate tax payers can claim back more in tax relief, depending on their earnings.

“Furthermore, with pensions, the tax man allows you to use any unused allowance from the previous three tax years as well as this year’s quota. This is known as Carry Forward. If you can afford to, it’s worth considering using up not just this year’s allowance (up to £40,000) but any allowance left over from previous years as well. You’ll need to have earnings equivalent to the gross value of any contributions you wish to make, though, or you won’t be entitled to receive tax relief on the amount above.”

6. Use your SIPP to leave a legacy

“Your children can receive any remaining pension funds without paying the high death charges previously levied. If you pass away before age 75 there will be no tax to pay on any monies paid out to your children. After age 75, the amount of tax they may have to pay will be determined by the income tax position of the person who receives an income or lump sum from the pension. 

“If you have significant savings in other assets such as ISAs and general investment accounts, it may be wise to use these first and delay taking money from your pension so that more of your legacy ends up in your children’s hands.

“The rules allow for a pension which is passed on to be further passed on upon death by the next nominated successor. In many ways, pensions have become the ultimate intergenerational savings vehicles – it’s possible that even your grandchildren could benefit from your SIPP! In fact, if you’re close to 75 and your children are high rate tax payers and not in need of the money, passing on to the grandchildren in the initial instance could be the most efficient way to pass on the funds as they could withdraw up to their personal tax allowance – £11,500 in 2017/18 – without paying any tax at all if they have no other income.”