Why a SIPP Might Be the Smartest Way to Save

This is a guest post from one of our UK readers Martin. He talks about SIPP, which is equivalent to IRA and Roth in the US. You get tax advantage to contribute to the pension plan provided you delay the withdrawal. Like IRA’s, you’ll get complete freedom in choosing the investment vehicles for your retirement saving. Enjoy the reading!

Whether you’re thirty-five or fifty-five, it’s essential to spare some time every now and then to think about your retirement plans. If you want to have more than the state pension provides – and this is certainly advised – it’s essential that you start saving for your old age from as early as you possibly can.

When you ask friends and family about how might be the best to save for your future, it’s a common experience to get a number of different answers. Everybody professes to be an expert, and this can lead you to feel confused as to what exactly is the right course of action to take. I

n this article, we suggest that – although it might not be the best option for everybody – a Self-Invested Personal Pension (commonly abbreviated to SIPP) could be a solid way to generate a decent amount of interest on your retirement fund, and that – compared to other forms of savings – there are other key benefits that might make a SIPP the right option for you.

Starting Early Is the Harsh Reality

If you’re a young adult, many people will give you the (idealistic but true) piece of advice that you should start saving for your future as young as you can, as this facilitates the maximum amount of savings.  However, the realities of our personal finances in today’s times are more complicated than they were even twenty years ago.

Even if you’re of the qualifying criteria to be of pension earning status, you still might not be able to if you’re saddled with student loan debt, credit card bills and whatever else you’ve got to contend with – in other words, saving for a retirement is always towards the bottom of the list of financial priorities, when really it needs to be closer to the top.

The Options that Are Open to You

When you’re ready to commit yourself to saving, you need to assess all of the available options to you and figure out which ones are, firstly, practical ones for your given circumstances, and secondly, which are the ones that are going to generate you the most interest.

For example, you could simply place money in a standard current account each month for the next thirty years until you need it, but that’s not going to generate much interest. Conversely, you could invest your money into stocks and shares or Forex, but (in addition to the high-risk nature of forex if you’re not confident applying risk-management strategies,) the entry barrier is relatively high to these categories of investment schemes. So what are you left with?

Introducing the SIPP

Unlike other methods of saving, the Self-Invested Personal Pension has a relatively low barrier to entry and have a range of potential benefits. It might not be perfect for everybody, but we believe that SIPP, like the ones offered by providers like James Hay, could be a fine solution for those people who want to make their money go further.

A SIPP is essentially a private pension pot where once you’re passed the pension drawing age, you can take as much from the pot as you’d like in one go. This is one of the SIPP’s main benefits, because, with a regular private pension, you’re forced to withdraw money at regular, fixed installments that may not suit the thing you’re trying to spend your money on.

In addition, a SIPP is a working investment. This means that as you’re adding money to the pot, a professional investor is working with your money across a portfolio of potentially thousands of investment funds to help you make the most out of your cash.

Ultimately, what this means to you is that if you’re lagging behind a little in your preparations for setting up your pension fund, don’t worry about it too much, as with a SIPP, your investment manager will help you find the best investment opportunities for your money as soon as you get around to setting up the fund.

Spending Your SIPP

When you get to retirement age and you’re ready to start extracting money from your pension, with a regular pension you’re limited to withdrawal through monthly installments. Alternatively, with a SIPP, alongside monthly withdrawals, you can extract as much or as little as you choose to in lump sums.

This means that if you’re looking to purchase a home for buy-let purposes, but you can’t afford the mortgage down payment, you can access your SIPP funds to help cover the cost.

In conclusion then, a SIPP is one of many available options available to anybody looking for an appropriate pension pot. It’s unrealistic to assume that you will be able to live well off a state pension alone, and a SIPP provides the owner with a way to maximize your savings through calculated investments, and all with a moderate barrio to entry. It won’t be everybody’s ideal pension pot, but it could be one to look for.

SB’s Thoughts – Wherever you live, state managed pension plans, social security schemes, etc. is not going to provide us with sufficient retirement income. It’s kind of mandatory that you contribute your saving into a retirement fund. So start contributing to SIPP today if you are in the UK, RRSP if you’re in Canada and in IRA, provident fund in India and 401(k) if you are in the US.

Readers, are you saving and investing for your retirement?