Transferring a Pension to a SIPP

Transferring a Pension to a SIPP

Published: September 2018


It may be the case that you are considering transferring your pension into a Self-Invested Personal Pension more commonly referred to as a ‘SIPP’, but are unsure as to the advantages of doing so. As with most financial planning and investment decisions, changing your pension can be quite a daunting prospect and may not be something you fully understand, which is why it is important to seek the right sort of financial advice. Therefore, understanding what a SIPP is, as well as the reasons why you might consider whether to switch to one, may help you to decide if it is the right choice for you.

What is a SIPP?

A SIPP is a form of personal pension, allowing potentially greater access to a number of investments that you may otherwise struggle to obtain via a ‘normal packaged’ personal pension. According to recent statistics it is thought that an estimated one million people in the country have decided to use a self-invested personal pension.

Transferring to a SIPP

Managing your pension, which may entail transferring to a SIPP, might be part of a wider investment objective you have, working alongside your longer-term financial planning strategy.

It is important to note that a SIPP can run alongside your current workplace pension. With many people changing jobs on average at least 11 times during their working lives, it can mean that there are a number of workplace pensions to keep track of, and this can lead to people forgetting about previous workplace pensions, which may be left unclaimed.

It is estimated that in the UK there is over £400 million in pension savings that lie unclaimed due to this very reason, leading to the creation of the government led Pension Tracing Service; a website for people trying to locate old pension pots.

A potential problem with some older dormant pension schemes is that whilst the pension contributions have ceased, the charges may not have and could be higher if the pension is sitting in the wrong investment. By seeking regulated financial advice and making the decision to consolidate your pensions and transferring them into a SIPP, this can enable you to have more control over your investment strategy, based on your attitude to risk, allowing you to build a valuable managed portfolio.

When it comes to how you want to fund your retirement, a SIPP can help to provide a degree of flexibility in terms of how you control your investments, meaning that if you decide at a later date to change your strategy (perhaps as you are approaching retirement age) your Financial Adviser can help you to do so.

Diversity of Investments to Choose From

With a large number of packaged pensions, that insurance providers offer, you are often only able to gain access to the limited number of funds they offer, with charges often being high. Whereas a SIPP could enable you to choose from a wide variety of investments, potentially making a big difference to how well your pension performs overall, having a considerable impact on the income that you are able to draw down in retirement.

SIPPs work differently. For example, if you have a SIPP account, you may be able to access a number of different investment funds, such as trusts, shares, and potentially even foreign shares and company bonds. Depending on your Investor classification, choosing what to invest in can be an attractive option, particularly for more experienced investors, as it enables you to consider a variety of asset classes recommended by your financial adviser and you can decide what it is that you feel comfortable investing in.

Reduced Costs

It can be the case that older personal pensions have high administration costs, as well as potentially hidden charges too. This, combined with poor performance, can have a major impact long-term on your retirement fund. It is also one of the many reasons why so many people decide to transfer their pension to a SIPP.

Tax Relief on Pensions

In the same way that pensions are subject to basic rate tax relief of 20% on personal contributions, SIPPs provide the same tax benefits; it is worth pointing out that, if you are in the higher rate taxpayer bracket you may be able to claim the additional higher rate tax relief via your self-assessment.

Since ‘Pension Freedoms’ were introduced in May 2015, it is now possible to start drawing your pension funds from the age of 55; the first 25 percent can be withdrawn completely tax free as a lump sum, although the remaining 75 per cent is considered as income in the year you receive it, meaning it is taxed at your highest personal rate of income tax at that time.

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