Considering A SIPP To Boost Your Pension

Posted on: 14 August 2008 by Gareth Hargreaves

With retirement imminent, could a Self Invested Personal Pension be the right way to add to your income?

“I hope to retire in 10 years or sooner. Can I pay into a SIPP on top of my existing pensions? What kind of portfolio would be best to invest in on this time scale?”

Alan Dick CFP, Forty Two Financial Planning:

You can pay into as many different pensions and types of pension as you want to under the new pension regime introduced in April 2006. This was part of the Government's “pensions simplification” strategy although pensions are still a long way off of being simple.

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As long as the total contribution to all pensions doesn't exceed 100 per cent of relevant earnings - or £235,000 if less - each year you should qualify for tax relief on anything invested in your SIPP. In fact in the year in which you retire there is no limit on contributions.

The second part of your question is slightly more difficult as it is very personal. A number of factors will influence the choice of asset allocation such as:

  • Will you buy an annuity in 10 years time or begin drawing an income from your invested pension fund under the Unsecured Pension (USP) rules. If you go into USP your investment horizon could easily be 20 years or more which would have a bearing on the investment decision.
  • Your own attitude to investment risk - although you must be careful as many people are willing to take risks that are greater than they can afford or are not prepared to take the level of risk required.
  • Your other sources of income and capital - this would include income from other pensions.

There is no doubt that any investment portfolio - pension or otherwise - should be well diversified including Cash, Fixed Interest, UK equities and International Equities. Too many people ignore international diversification in both equities and fixed interest assets which greatly increases the overall risk to their portfolio. Given the minimum time frame of 10 years I would suggest that most people should still consider around 50 to 60 per cent in equity and property asset classes to maximise the probability of a decent return but this figure may need to be reduced as time passes.

Marlene Shalton, Chambers Morgan James Financial Management:

Yes, it is possible to pay into a SIPP on top of your existing pensions, provided that the total amount you contribute to them all does not exceed 100 per cent of your total gross income. This also includes your employer's contributions if they are putting into pensions on your behalf, AVCs and FSAVCs. Remember that it is the gross amount that you calculate, not the amount after basic rate tax relief of 20 per cent. So if you earn £50,000 you can invest up to £50,000 gross a year up to a ceiling of £235,000. After basic rate tax, then the amount you pay would be £40,000. Higher rate tax payers can claim back a further 20 per cent through their tax returns.

You should not exceed the Lifetime Allowance either, as otherwise hefty tax penalties apply. This means in 2008/09 that the gross contributions and the growth of all your pension plans must not exceed a total value of £1.65 million.

The type of portfolio would depend on your attitude to risk and the years to retirement. The longer the period, the more risk you can actually take even if with other investments you tend to be more cautious. If you are risk averse, then I would question why you are investing in a SIPP anyway, as typically they are pension vehicles for those who wish to invest in a wide range of investments, not normally associated with ordinary pension plans or stakeholder pensions.

There are higher costs involved so it pays to shop around or seek advice.

Anna Sofat, Addidi Wealth:

Yes you can invest in a SIPP alongside your existing pensions. There are basically three types of SIPPs :

  • Insured SIPPs which are typically provided by insurance companies and provide access to a range of insured funds. These can vary from a few dozen to several hundred funds.
  • Hybrid SIPPs which provide access to the insured funds plus a little more investment flexibility, perhaps providing access to a few hundred to thousand plus funds - OEICs and unit trusts as well as insured funds. Some of these provide access to shares, exchange traded funds and gilts, for example Nucleus or SIPPcentre.
  • Full SIPPs tend to provide the pension wrapper leaving you to make the investment decision. These tend to cost several hundred to set up and a few hundred pounds annually as well as the cost of the investments. You should only consider these if you are looking at direct property investment or unlisted shares, neither of which I would recommend given the timescales involved.

The portfolio make up would depend on your risk profile but assuming moderate risk, I would suggest that you look at about 50 per cent maximum in equity funds - UK and overseas - about 25 per cent in fixed interest - gilt and bond funds - 10 per cent in property funds - with no gearing i.e. financing to fund property purchases - and the remaining in alternatives - absolute returns funds, fund of hedge funds and/or infrastructure funds. You may wish to consider pass tracker type funds to keep the cost down.

You should start to move more into fixed interest funds during the last 5 years of retirement so by year 10, you have everything in cash or gilts so you are not risking everything if the markets are not favourable when you retire.

Web Links

Forty Two Financial Planning: www.fortytwofp.com

Chambers Morgan James Financial Management: www.chambersmorganjames.co.uk

Addidi Wealth: www.addidiwealth.com


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