Guest blog by Interactive Investor

Growing your pension is important, but it often drops down the priority list – especially if you’re self-employed or work as a freelancer or contractor.

That’s where a Self-Invested Personal Pension (SIPP) can help. It works like any other pension, but with more flexibility and control over where and how your money is invested.

If you haven’t heard of one before, don’t worry. With the help of this guide, you’ll discover what a SIPP is, how it could work for you and how to set yours up.

What is a SIPP?

A Self-Invested Personal Pension (SIPP) is a type of pension that you can set up yourself. It’s like many other pension types as it helps to grow your earnings tax-efficiently for retirement. The difference of a SIPP is you’re in control.

You can choose:

• How your money is invested
• How often you contribute
• How much you pay in
• How you take your retirement income

You can pay in as much or as little as you want, up to certain limits, whenever it suits you. SIPPs are designed to be flexible and work around your individual needs.

The performance of your SIPP, and the value of your pot when you come to retire, depends largely on what you put in and how your chosen investments perform over time.

Why SIPPs are a smart choice for the self-employed

If you’re a self-managed income earner, you already enjoy the control and flexibility you need at work, so why not extend that to your retirement savings too?

Here’s a quick look at the benefits of investing in a SIPP and how it can help you build the future you deserve.

Save on tax

By putting your money in a SIPP, you can make every pension contribution go further with their tax benefits:

• Tax relief – Each time you make a payment into your SIPP from your taxable income; you’ll receive 20% tax relief from the government. So, for every 80p you contribute, the government tops it up to £1.
• Tax-free growth – Any investment returns gained inside your SIPP are sheltered from UK income tax, dividend tax and Capital Gains Tax.
• Tax-free lump sum – When you withdraw money from your pension, you can take up to 25% of your pot as a tax-free lump sum (currently capped at £268,275).

Enjoy pension flexibility

While building your retirement pot, you need your pension to work around you and your income. With a SIPP, you can contribute regularly or make one-off lump sum payments, whenever it suits you. This flexibility can be especially helpful if your earnings are irregular or fluctuate.

When it comes to taking your retirement income, SIPPs can’t be beaten on the range of flexible withdrawal options they offer. We’ll cover more about these options in the later section: taking your retirement income.

Access a wide range of investments

In the same way you decide how to run your business, you can also call the shots on how and where you invest your pension savings.

Investment options for your SIPP can vary depending on who you choose as your provider. At interactive investor (ii), we offer one of the widest ranges of investments for SIPPs, from ready-made funds to international shares.

Bring all your pensions together

You might have other pensions from previous workplace schemes or old private pensions lying about – keeping track of these can be hard work.

It’s possible to bring your old pensions together, or “consolidate” them, into a single SIPP. This makes it easier to manage your savings, helps you stay on track to the retirement you deserve, and potentially reduces your costs too.

How SIPPs work

If you like the sound of a SIPP, here’s some finer detail on how they work and how to get started with yours.

Setting your SIPP up

It’s simple to get your SIPP up and running. The first step is finding a provider that offers what you need at the best price. There are many different SIPP providers in the UK – from traditional life companies to more modern investment platforms like interactive investor (ii).

Once you’ve chosen your SIPP, you can usually apply online in minutes. Most SIPPs can be managed online and via a mobile app, so you can easily keep an eye on your savings and investments.

Contributing to your SIPP

You control the way you pay into your SIPP. You can usually make regular, monthly payments or one-off contributions when it works best for you – or a mix of both.

You can add as much as you’d like to your SIPP, as long as it’s within the pension annual allowance. This is currently up to 100% of your salary or £60,000 – whichever is lower. The annual allowance includes tax relief and applies to your total contributions to all pensions you hold.

If you’ve made an individual payment to your SIPP from your taxable income, basic-rate relief is claimed automatically by your SIPP provider. If you’re a higher-or-additional-rate taxpayer, you can claim the extra tax relief your owed via your Self-Assessment tax return.

Choosing your investments

Grow your future exactly how you’d like. Choose from funds, investment trusts, exchange traded funds (ETFs), bonds and shares, or a mix – wherever you feel comfortable investing your money.

Though SIPPs tend to offer a huge choice of investments, many – including ii – also offer low-maintenance, managed fund options. So, you can be as hands-on or hands-off as you like when investing in your SIPP.

And in the spirit of flexibility, you can change your investments over time if they’re not working for you, to match your changing needs, risk appetite and priorities.

Taking your retirement income

When you make the decision to retire and start taking money out of your SIPP, you have huge flexibility over how to do this.

From age 55 (57 from 2028), you can usually access your pension in any of the following ways:

• Tax-free cash (up to 25% of your SIPP can be taken tax-free)
• Income drawdown
• Lump sums (sometimes called Uncrystallised Funds Pension Lump Sums)
• Annuity

And it doesn’t have to be one or the other. You can choose a combination of withdrawal options that best suits your retirement income needs.

Some people may choose to keep paying into their SIPP after accessing, to benefit from their tax efficiency. Though it’s possible to do this, the maximum amount you can pay in is greatly reduced to the lower of your taxable earnings or £10,000. This is known as the Money Purchase Annual allowance.

Things to know before opening a SIPP

There are a few important things to pay close attention to before opening your SIPP:

• What you’ll be charged – Different SIPP providers have different charges. These include platform fees, investment costs and trading fees, which can all eat away at your returns. Make sure you’ve compared charges and chosen the SIPP provider that offers the best value for what you need.
• Transfer considerations – If you’re planning on transferring your old pension(s) to a SIPP, check you won’t lose any special benefits by doing so. It’s also important to check if your current provider charges exit fees to leave their scheme.
• Investment knowledge and confidence – SIPPs offer great choice and flexibility, but they aren’t for everyone. If you don’t want or need to take more control over how your pension is invested, a SIPP may not be right for you.

Why choose the ii Personal Pension (SIPP)?

The ii Personal Pension is an award-winning, low-cost SIPP. You’ll get all the usual benefits of a SIPP, with added value, choice and support. That’s why, for the fourth year in a row, Which? have recognised ii as a recommended SIPP provider.

Ready to take control of your pension savings? Discover more about the ii SIPP or browse more partner offers on MyMarketplace.

Risk warning
The content is not intended to be a personal recommendation. The ii SIPP is for people who want to make their own decisions when investing for retirement. As investment values can go down as well as up, you may end up with a retirement fund that’s worth less than what you invested. Usually, you won’t be able to withdraw your money until age 55 (57 from 2028). Before transferring your pension, check if you’ll be charged any exit fees and make sure you don't lose any valuable benefits such as, guaranteed annuity rates, lower protected pension age or matching employer contributions. Tax treatment depends on your individual circumstances and may be subject to change in the future. If you’re unsure about opening a SIPP or transferring your pension(s), please speak to an authorised financial adviser.