Is a SIPP the best way to boost your retirement income as the State Pension rises?

Could a SIPP help to alleviate the challenges posed by changes to the State Pension?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With life expectancy continuing to increase, it is perhaps unsurprising that the State Pension age is doing likewise. After all, a longer retirement could make it less affordable at a time when the population is ageing.

In fact, over the next two decades, the State Pension age is due to rise by three years, which means that an individual will need to reach 68 before they receive their State Pension. As such, it may be necessary for people to build a sizeable nest egg in order to have greater flexibility in terms of when they retire. One means of doing so could be through a Self-Invested Personal Pension (SIPP).

Advantages

The major advantage of a SIPP versus a workplace pension is flexibility. There are a wide range of investments available within a SIPP, from shares to even commercial property. As such, for investors who wish to take a hands-on approach to their retirement planning, it is possibly unrivalled in terms of the control which an individual will have on their financial destiny.

As with a workplace pension, a SIPP benefits from favourable tax treatment. Contributions are not subject to income tax, which means that the amount invested within a SIPP could grow at a faster pace than amounts invested through an ISA or bog-standard sharedealing account.

The government recently made changes to the way in which pensions such as a SIPP can be withdrawn. It is possible to commence withdrawals from the age of 55, with an individual having a significant amount of flexibility in terms of when and how much they choose to withdraw. The first 25% of amounts withdrawn is tax-free, which further enhances the appeal of a SIPP.

Disadvantages

With greater control comes greater responsibility. For investors who do not have the time or inclination to manage their own pension, a SIPP may be less appealing. That said, it is still possible to invest in funds or individual shares if an investor wishes to simplify where their SIPP is invested.

SIPP providers generally charge fees for administering the product. They can vary significantly, so it may be worth an investor doing their homework in terms of finding the lowest-cost provider. However, for the amount of flexibility they offer, many investors may feel that the annual charges associated with a SIPP offer good value for money.

As with a workplace pension, any amounts invested in a SIPP cannot be withdrawn until age 55. As such, they lack accessibility in this regard when compared to an ISA.

Outlook

Over time, it seems likely that the State Pension will become a smaller part of most retirees’ income. The age at which it is payable is increasing, while the amount paid may not rise as quickly as it has in the past, since it may become less affordable as the number of retirees increases due to an ageing population. As such, a SIPP could be a worthwhile means of planning for retirement, with it offering flexibility and tax advantages over the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Is Rolls-Royce’s share price an irresistible bargain?

Is Rolls-Royce's share price the FTSE 100's greatest bargain today? Royston Wild explains why he would -- and wouldn't --…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Is the Vodafone share price a wonderful bargain or a horrible value trap?

As the Vodafone share price continues to fall, is it now a stock to buy with a view to a…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

I’d buy 95,239 shares of this banking stock to generate £200 of monthly passive income

Muhammad Cheema takes a look at how Lloyds shares, with a dividend yield of 5.9%, can generate a healthy monthly…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Can FY results give the Antofagasta share price a long-term boost?

The Antofagasta share price has had a good five years. Now the company says it's set to enter a new…

Read more »

Person holding magnifying glass over important document, reading the small print
Dividend Shares

Can I make sustainable passive income from share buybacks?

Jon Smith notes the rise in share buybacks from FTSE 100 companies, but flags up why they aren't great for…

Read more »

Front view of a mixed-race couple walking past a shop window and looking in.
Investing Articles

After the Currys share price rockets, here are more potential UK takeover targets!

The Currys share price has surged 39% higher in response to news of a takeover bid. Which UK stocks could…

Read more »

Investing Articles

Down 25%, where will the British American Tobacco share price go next?

The British American Tobacco share price has taken a hit. But this Fool isn't deterred. He think's now could be…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

2 cheap dividend stocks I’d snap up in a heartbeat!

This Fool is on the look out for quality dividend stocks and earmarks these two firms as great options to…

Read more »