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The government recently made changes to the way in which pensions such as a SIPP can be withdrawn.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 The first 25% of amounts withdrawn is tax-free, which further enhances the appeal of a SIPP.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As with a workplace pension, any amounts invested in a SIPP cannot be withdrawn until age 55.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.
