Self-Invested Personal Pensions for the self-employed can help bridge the gap left by workplace pensions, offering flexibility and investment control.
Self-employment has many perks that make it an attractive life choice for millions of people around the UK. But there are downsides that need consideration, one of those being the lack of employee benefits available – like a workplace pension scheme. With no auto-enrolment or employer contributions, the responsibility for setting up an appropriate pension plan sits squarely on your shoulders.
If the idea of DIY retirement planning feels overwhelming, you’re not alone. Many self-employed people find it challenging to figure out the best way to save for their future. In fact, according to the Institute of Fiscal Studies (IFS) report, only 20% of UK’s self-employed people have a private pension.
Only 20% of the UK’s self-employed people have a private pension
Setting up a personal pension is essential for building your retirement savings in a tax-efficient way (and even without an employer scheme) and there are different types of personal pensions available. One that many self-employed people find appealing is a Self-Invested Personal Pension (SIPP). A SIPP offers greater flexibility and control over your investments, along with tax benefits that can help you save more efficiently for your future.
In this guide, we’ll walk you through the main things you need to know about SIPPs, explain their potential benefits, and suggest next steps if you think it could be the right fit for your retirement planning.
What are the advantages of a Self-Invested Personal Pension for the self-employed over a standard personal pension?
A Self-Invested Personal Pension (SIPP) is a type of personal pension that allows you to decide how and where your pension savings are invested. While traditional pensions often limit your options, a SIPP gives you access to a much wider range of investments, like stocks, funds, and even commercial property. What’s more, a SIPP allows you to appoint a professional investment manager to manage the investments within your pension for you on a discretionary basis.
Self-Invested Personal Pensions for the self-employed are particularly appealing if you’re self-employed because of the flexibility they offer when it comes to paying in. While your employed friends and colleagues enjoy a stable monthly salary, your income could vary from month to month. A SIPP lets you adjust your contributions to suit your ‘slightly more unpredictable’ income – whether that means saving more in the good months or pausing contributions when you’re between clients.
In short, a SIPP is built to give you the control and freedom you need to save for retirement in a way that works for you.
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What are the tax benefits of a SIPP?
One of the standout benefits of a SIPP is its tax efficiency. Depending on how your business is structured, you can save on tax in a few different ways:
1. If you’re a sole trader or contractor
- Contributions to your SIPP are made from your taxable income, and the government provides tax relief.
- For every £80 you contribute, HMRC adds £20 in basic-rate tax relief, turning it into £100.
- Higher- and additional-rate taxpayers can claim back even more tax relief through their self-assessment tax return, boosting the overall tax benefit.
2. If you run a limited company
- Your company can make direct contributions to your SIPP as a business expense.
- This reduces your corporation tax bill and avoids National Insurance contributions, making it a highly tax-efficient way to save.
Additionally, investments in your SIPP grow free of income tax and capital gains tax, helping your money work harder over the long term.
Can I include family members in my SIPP?
Yes. For example, you can set up a SIPP for a spouse or child – even if they don’t have an income.
The government allows contributions of up to £2,880 annually for non-earners, which is topped up to £3,600 with tax relief. This can be a smart way to build up pension savings for your loved ones while taking advantage of tax-efficient contributions.
What can I invest in with a SIPP?
One of the other major benefits of a SIPP is its investment flexibility. Unlike traditional pensions, which often limit your options, a SIPP gives you access to a wide range of investments, including:
- UK and international shares
- Investment funds
- Exchange-traded funds (ETFs)
- Commercial property
- Bonds and gilts
This level of choice lets you tailor your investments to your goals, risk tolerance, and time horizon. Whether you’re looking for steady growth, higher-risk opportunities, or a mix of both, a SIPP can accommodate your preferences.
That said, creating and managing an investment strategy requires time and a certain level of financial confidence. If you’re not comfortable, or don’t have the time to make these decisions yourself, speak to an independent financial adviser to find out what they can do for you.
Can I borrow money against my SIPP?
Yes, but only under specific conditions. Borrowing within a SIPP is typically used to fund investments like the purchase of commercial property. You can borrow up to 50% of the net value of your SIPP.
For example, if your SIPP is worth £200,000, you could borrow £100,000 to help fund an investment. However, borrowing must follow strict HMRC rules. If these rules are breached, you could face significant tax penalties.
If you’re considering borrowing through your SIPP, it’s essential to consult with an independent financial adviser to ensure you stay within the guidelines.
Can I consolidate old pensions into a SIPP?
Yes, that’s possible, and there are benefits:
- Simplified management: No more tracking multiple pension statements – you’ll have everything in one account.
- Lower fees: Many SIPP providers charge flat fees, which could be more cost-effective than the percentage-based fees of older pensions.
However, consolidation won’t necessarily be the best option. Some older pensions, such as defined benefit pensions, may offer guaranteed income or other valuable benefits that you’d lose if you transfer them. For example, you might give up guaranteed annuity rates or a lower protected pension age.
Before consolidating, we recommend you seek advice from an independent financial adviser. They can help you understand the pros and cons given the nature of your existing pensions and make sure you don’t lose out on any benefits that could be worth more in the long run.
What happens when I want to access my SIPP?
As with all personal pensions, you can access your SIPP from age 55 (rising to 57 in 2028). Here’s what you can do:
- Take up to 25% of your pension pot as a tax-free lump sum.
- Leave the rest invested and draw an income when you need it (this is called pension drawdown).
- Purchase an annuity for a guaranteed income for life.
The option you choose will depend on your current circumstances and future retirement goals. If you’re not sure which is the best path to take, speaking to an independent financial adviser will help you decide.
More FAQs abut SIPPs
1. How much can I contribute to a SIPP?
You can contribute up to 100% of your earnings, capped at £60,000 annually. If you earn less than £3,600, you can still contribute up to £2,880, which the government tops up to £3,600 with tax relief.
2. Can I have a SIPP and an ISA?
Yes, and many people use both. SIPPs are ideal for long-term retirement savings, while ISAs offer more flexibility for short-term or medium-term goals.
3. What are the fees and charges for a SIPP?
SIPP fees vary but may include:
- Setup fees
- Annual management fees (flat or percentage-based)
- Dealing fees for buying and selling investments
Some providers offer flat fees, which can be cost-effective as your pension grows. Comparing providers will help you find one that suits your needs.
4. Can I lose money in a SIPP?
Yes, because your investments are subject to market performance. It’s important to diversify your portfolio and review your investments regularly to manage risk.
5. Do I need a financial adviser to open a SIPP?
Not necessarily. If you’re confident managing your investments, you can open a SIPP yourself. However, if you’re unsure or want expert advice, an independent financial adviser will help guide you.
Is a SIPP the right choice for you?
Self-Invested Personal Pensions for the self-employed could be a great option if you’re looking for flexibility and control over your retirement savings but they’re not the right fit for everyone. The best way to know for sure is to get professional advice.
A financial planner can help assess your situation, taking into account your income, tax position, existing pensions, and long-term goals. They can also ensure you don’t lose valuable benefits from other pensions if you’re considering consolidation.
If you’re unsure where to start, speaking to an expert can help you make an informed decision and give you confidence that your retirement plan is on the right track.
Amber River Financial planning
At Amber River, we understand the unique challenges self-employed people face when planning for retirement. We’re here to help you make sense of your options and create a tailored plan that works for you.
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Disclaimer
The information within this article was correct at the time of publishing, but laws and tax rules are subject to change. Your circumstances and where you live in the UK may also have an impact on your tax treatment.
To learn about the government’s most recently-announced changes, please read our latest budget roundup: 2024 Autumn Budget Update
