SIPPs (Self Invested Personal Pensions)
These are also retirement savings account. Most employers will not contribute to a SIPP and especially if they have a company pension available to employees.
The SIPP is best placed for self-employed individuals or those on temporary contracts who have no recourse to a company-based pensions. That said, individuals with company pensions can still open a SIPP and contribute to it.
Contribution to a SIPP are seen as pre-tax hence the government (HMRC) gives you an extra 20% (into the account) and for higher rate tax payers, you complete a tax return to claim the additional tax relief.
E.g. if you are a normal rate tax payer you contribute £100 and the government (through HMRC) gives you 20%. Which implies it has cost you £80. For higher rate tax payers complete a self-assessment to get an additional 20% off.
SIPPs can usually be used as retirement income and withdrawn 3 years before the normal retirement age. Example is current retirememy age is 68, SIPPs can be accessed at age 65. Pension income is taxed but the first 25% of pension income taken as a lump sum is untaxed.
Note: according to current rules my total annual pension contributions (across all options) cannot be more than £40k but excludes LISA allowance of £4k if used for retirement.
I am currently in a dilemma – should I open a SIPP OR retain my LISA after my house purchase as my second form of retirement savings. I am yet to undertake a rudimentary calculation of the tax benefits at retirement. The info below is an example only and does not take account of personal tax liabilities etc
|Contribution p.a. (Limits for these accts)||£4k p.a = £333pcm Plus 25% gov’t bonus |
Total = £5k
|£40k p.a. Includes all other pensions |
Total = £40k
|Contribution – pre/post tax||Post-tax||Post-tax if permanent employee |
Pre-tax if self-employed
|Assuming 25yr savings @7% interest compounded annually||Assume you save £4kp.a |
Total Deposit – £100k
HMRC Rebate@25% – £25k
Total Contribution – £125k
Total Interest – £203k
Total Amount – £328k
|Assume you save £4kp.a |
Total Deposit – £100k
HMRC Rebate@20% – £20k
Total Contribution – £120k
Total Interest – £194k
Total Amount – £314k
|Tax at Retirement||Withdraw cash free||Withdraw at income tax rate. ***|
|Potential Total Amount||£328k tax free||£314k@20% = £251k|
Web based compound interest calculator used
** may affect your pension cash free lump sum
Do note however:
- For self-employed, contribution is made before your annual tax is paid, therefore, a lower tax burden. You can also contribute the full annual amount of £40k (google to find latest figures). For those who work with their spouses, you can also contribute to a personal pension for them, to the same amount which means a total of £80k in pension savings for the household but in different names. (again seek advice on this)
- For permanent employees, your contributions to a workplace pension and your employer’s contribution would count towards your annual pension savings limit of £40k. For those on final salary pension schemes, please refer to your scheme administrator for your annual limit. Any unused limit can be used in two ways:
- Through your company AVC – this is an additional voluntary contribution scheme through your workplace. Your employer will not contribute. All your contributions are paid pre-tax hence you have a higher take home than if you did this through a SIPP.
- Through a separate SIPP as outlined above.
- Or other ways as advised by your financial adviser.