Today, growth in the SIPP markets driven by investment platforms has led to a £200 billion boom in the value of self-invested personal pension schemes in the UK.
In addition to this, two-thirds of SIPP schemes used today are non-advised, meaning that UK residents are increasingly eager to control their investments ahead of retirement.
But what are SIPPs and how can you transfer your existing pension into a self-invested personal pension? Let’s explore some of the key considerations to take when embracing greater flexibility:
SIPPs and Their Many Perks
Self-invested personal pensions allow individuals to save, invest, and build a tax-free pot of money for their retirement. Although SIPPs are also a form of personal pension and work similarly to traditional pensions, the level of flexibility and control you have over your pensions is significantly different.
When using a SIPP, you can pick and manage your investments or pay an authorised financial advisor to do so based on your level of risk tolerance and specific investment goals.
Because you have full control over your investments within your SIPP, you can make changes or add extra assets as and when you wish.
The investment options provided by SIPPs are more extensive than traditional pensions and include company shares both domestically and overseas, collective investments, and property and land.
Different SIPP providers can offer even more alternative investment options to combine as part of your investment strategy.
Crucially, a SIPP also offers tax relief benefits for investors. The UK government has added a tax relief of 20% on eligible SIPP contributions. This means that for every £800 you save, the government will add an extra £200 to bring your total value up to £1,000.
Considerations Before Transferring Your Existing Pension
Self-invested personal pensions have become particularly popular among experienced investors and self-employed individuals who may not have access to a typical workplace pension.
The SIPP boom has also seen more UK workers transfer their existing pensions into a SIPP, with the appeal of extra control a key factor driving their decision.
Despite this, before you pick a SIPP provider and begin transferring or consolidating your old pensions, there are a few risks that could see you losing money or valuable benefits that you should consider.
Key considerations before you transfer your existing pension into a SIPP include:
1. Check for Safeguarded Benefits
Different pensions come with various perks and benefits. These could include guaranteed annuity rates or a lower protected pension age than the Normal Minimum Pension Age (which is set to rise to 57 from 55 in 2028).
In the case of some pensions issued before 2006, you may find that your maximum 25% lump-sum withdrawal upon reaching pension age could be higher. This benefit would be at risk of being wiped out if you transfer into a SIPP.
You’ll also need to check whether you plan to hold both drawdown and non-drawdown pots when transferring to your new SIPP. If so, you can’t allocate specific investments to each pot separately, which may convolute the transfer process.
As a result, the value of each pot will change in line with the overall performance of all the investments held within your SIPP.
If you’re concerned or unsure whether you have benefits through your existing pension that could undermine your new SIPP, it could be worth consulting MoneyHelper, or Pension Wise if you’re over 50, for impartial advice.
2. Are You Able to Find Your Pensions?
If you’ve worked for more than one employer, the chances are that you have multiple pensions across different providers if you haven’t consolidated them.
This isn’t necessarily a problem, and it’s entirely possible to consolidate your pensions into a single SIPP, but locating them could be time-consuming and convoluted at best.
If you’re unsure of your historical pension providers, you can use the government’s Pension Tracing Service to look up your old pensions.
Many pension providers will continue to send correspondence like annual statements even if you’ve long stopped paying into them. These will have your policy number, which can be used for pension tracing.
However, if you can’t find your statement, you should still be able to access your old pensions by getting in touch with your provider and answering some questions to verify your identity.
3. Are There Any Exit Fees?
Never seek to transfer your existing pension without asking about exit fees. Some providers will charge a fee if you’re seeking to transfer or consolidate an old pension into a SIPP or any other form of personal pension for that matter.
Be sure to check the terms of your pension before moving your pot to a SIPP to avoid them eating into your wealth.
4. Are You Ready for Control?
Yes, the notion of greater financial control when it comes to your pension sounds appealing, but are you actually ready and available to invest the time needed to curate your own investments? Or to liaise with a financial adviser to accurately take steps to build your SIPP around your risk appetite and investment goals?
Workplace pensions are very hands-off, but this means that they can be a good choice for investors who are comfortable with taking a more passive approach to building their wealth for retirement.
If you’re inexperienced as an investor or don’t have sufficient free time to give your SIPP the attention it needs, then it may not be the right moment to transfer your old pensions over and take the reigns for yourself.
6. Pension? Or Inheritance?
A SIPP could be a great way of building inheritance for your beneficiaries. However, it may also mean that transferring your old pension could make it subject to inheritance tax.
With this in mind, it’s certainly worth seeking out financial advice if this may be the case for you.
The Path to Flexibility
Although there are certainly some important considerations to keep in mind, transferring your existing pension to a SIPP can be a great way of taking more control over one of the biggest investments you’ll ever make throughout your lifetime.
If you’re aware of the risks, fees, and time constraints ahead of starting your wealth journey with a SIPP, you’re ready to embrace the fully flexible potential of saving on your terms.
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