Choosing the right plan for your retirement

Many of us may often feel that the future, and retirement in particular, is a long way off. However, in order to have a sufficient nest-egg in place when you come to retire it is important to start thinking about your pension now.

You may already be paying into a pension pot with your employer, but it is always good to look at your other pension options. In fact, it can often turn out to be extremely beneficial to investigate your options.

Many providers offer personal pensions, such as stakeholder pensions, whereby you can put aside any funds you have letting them invest it on your behalf. For many of us, this represents a good choice; however, with self invested personal pensions (SIPPs), there is another option. One offering greater flexibility and range of investments.

Choosing the right plan for your retirement

SIPPs explained:
The really financially savvy amongst you may not need SIPPs explained, but for those who are learning about them for the first time it’s important to know how they differ from other personal pensions. The main difference is that they offer the freedom to invest your money in whatever assets you want, including shares and investment trusts. Choosing this kind of option puts all the decision making in your court – you essentially become the manager of your own pension fund.

Range of investments:
Choosing a leading SIPP provider for example, you’ll find a wide range of investments, such as:
• Stocks and shares
• Investment trusts
• Corporate and government bonds
• Permanent interest bearing shares (PIBS)
• Exchange traded funds
• Open ended investment companies (OEICS)

The general rule is the wider the range of investments the more you’ll pay when it comes to charges. When looking at a SIPP, it’s important to decide whether you’re likely to use all the potential investments available to you. If not, you may end up paying unnecessary charges. Remember, the best SIPP providers will offer you various options with different potential layers of investment.

A SIPP is a personal pension
Whilst the greatest advantage of a SIPP compared to standard personal pensions is the flexibility in the choice of investments, it’s worth remembering a SIPP is a personal pension meaning they are governed by the same rules relating to tax and contributions.

Rules on tax and contributions
Any contributions you make, your SIPP provider will claim back 20% from the government, adding this to your pot. This is the case for basic rate tax payers, while higher rate can reclaim another 20% through a self-assessment form.
Basically this means that for every £800 you pay in, this will be increased to £1,000. It is essentially an increase of 20% of what you end up with, or 25% of what you initially put in. Provided you pay income tax, you are able to contribute 100% of your annual income into your SIPP; however this is set at a limit of £50,000 a year.

Rules on withdrawing the money
A SIPP offers flexibility in the choice of investments, but when it comes to withdrawing your pension pot, the rules remain as steadfast as with other pensions. When you reach the age of 55 you’re able to take 25% as a tax-free lump sum, using the rest for income during your retirement – this is subject to income tax. Personal pensions are vital to put you in the best financial position come retirement. With the greater flexibility offered by a SIPP, it could be the perfect choice.
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