Is a self-invested personal pension (SIPP) right for me?

A self-invested personal pension or SIPP can be a great way to take control of your financial future and build wealth for retirement.

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.

A self-invested personal pension (SIPP) is an alternative way to save for retirement. However, it’s not suitable for everyone. But, as someone who wants to take ownership of my financial future, I think it looks a great way to invest in shares and build wealth.

Why invest in a SIPP over an ISA?

A SIPP has a few benefits over an ISA when investing for retirement. First, I can’t access my SIPP savings without penalty prior to reaching retirement age. This is a great way to save without being tempted to dip into my pot.

Second, a SIPP can provide an element of tax relief. The money I pay into an ISA or SIPP has already been taxed through PAYE or self-assessment. When withdrawing money from an ISA, it’s all mine. But I’ll be taxed when withdrawing from a SIPP. That’s because, whatever I pay into my SIPP, the government will top up each month by at least 25%. When withdrawing from my SIPP, I can take the first 25% tax free. The rest of my withdrawals will be taxed as income. Of course, I don’t have to pay £40k a year into my SIPP, I can contribute a maximum of 100% of my income. If I pay more (such as an unexpected windfall) I won’t receive tax relief on anything above this contribution limit. 

However, I won’t have to pay capital gains tax on any profits made from my investments. Best of all, earning dividends on the stocks I own, can really help build my final pension pot.

The limit to invest in a SIPP is higher than an ISA. This is currently £40k for a SIPP and £20k for an ISA each year. However, high net worth individuals need to be aware of overall pension limits and variations in claimable tax depending on personal wealth and circumstances.

Why invest?

Investing offers a way to accumulate exponential wealth thanks to the power of compounding. Company pensions and hedge funds use investing to do just that. By investing in stocks that pay regular dividends or funds with a decent interest rate, I can quickly see my wealth accumulate.

Best of all, it gives me full control over my investments. By opening a SIPP, I can be the fund manager of my own money.

As an example, if I invest £300 a month into a SIPP for 30 years, at a 5% annualised return. I’ll end up with over £244,612. Without the compounding effect, I’d have saved £108,000. So the interest earned makes a massive difference, in this case £136,612.

If I’m really savvy about my investments and achieve a 10% annualised return, the final sum increases to £618,852, an interest bonus of £510,852.

Changing the monthly contribution, the time invested or the interest rate will affect the final sum and, of course, none of those amounts are guaranteed.

What are the risks?

Experienced money managers who invest for a living manage company pensions. In theory, this should prepare them for any eventuality and hedge my funds against major loss. However, Neil Woodford’s fund mismanagement left many investors out of pocket and proved the exception to the rule.

When self-managing, I need to be confident in my investments. That means monitoring market movements. This can be a lot of work and not everyone has the time.

Investing carries risk, because the value of stocks can go up or down. And rules around pensions and tax can change depending on the government in power and the global economy.

Yet overall, I think investing is a rewarding and interesting pastime, so managing a SIPP appeals to me.

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 considered so you should consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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