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What is a SIPP – and How Does It Work? 

What is a SIPP – and How Does It Work? 

What is a SIPP – and How Does It Work? 

Planning for your retirement is essential. You have climbed the mountain and done the work – now it is time to reap the rewards and hopefully relax a little! 

But, to do so, it is essential to make sure, as early as possible, that you have chosen the right pension scheme that you can unlock when it comes to retiring. Nowadays, multiple pension schemes are available, which can make it somewhat complex to narrow down the right choice for your specific needs and wants for retirement.

A good place to help you get started would be Citizens Advice, however, have you ever considered a SIPP before? 

At LoanBird, we understand that customers from time to time will need access to emergency loans. But remember, this is a period that you should enjoy – the last thing you’ll want is to be worrying about money! Let’s dive into what SIPPs actually are, and whether or not they suit your ultimate retirement goals.

two people discussing what a SIPP is.

What Exactly Is a SIPP?

SIPP stands for Self-Invested Personal Pension, and it really does what it says on the label. It is a pension standard that encourages you to save money towards your own investments, unlockable when you eventually reach retirement age. 

What’s unique about this kind of pension is that you have total control over it. You choose the investments you want to make, and you manage them yourself – it’s a DIY approach to retirement funding. This means you can change your investment focus, add to your portfolio, and move your funds around. Many people seek the advice of a portfolio manager when it comes to SIPP investments – but the choice is ultimately yours. 

In this sense, SIPPs can provide different, and sometimes even more, investment opportunities than other ‘run of the mill’ pension options. Of course, your options will depend on your SIPP provider, so always check with them before you commit. It’s a good idea to research the market.  

Believe it or not, there are even apps and programs you can sign up for and use to manage your money on an automated basis. If you really want to go hands-off with your SIPP, make sure to look for robo-advisors!  

Regardless of how you get into a SIPP, this route can ensure that you always have full control over your retirement finances. It will also guarantee that whatever happens to your money, you are the sole person who can be held accountable. That might sound a little bit scary to some people, so again, the choice is yours. 

Managing Your SIPP?

It is important to remember that with a SIPP, you are managing your own pension at your own risk. Yes – you can seek advice from investment experts, but you’re pushing all the buttons. 

A financial advisor can look at your portfolio and do just that – advise. They’re not legally obliged to force decisions on you, giving you quite a bit of freedom, though leaving you at the mercy of the markets. 

Should you not fully understand the market, the investments, and the risks you are taking, you risk losing money on your pension and not being left with the retirement fund you were hoping for. Therefore, it’s worth looking at lower-risk opportunities if you could do with more of a safety net as the years go by. 

What Are the Advantages of a SIPP?

All is not lost – as there are plenty of fantastic advantages to using a SIPP to build up retirement credit. 

The first obvious advantage to holding a SIPP is that you can fully control your finances. You do not have to worry about finding a professional – and watch as your money does not go where you think it should. 

That also means that by the time you come to retire, you will already know what to expect, and there shouldn’t be any odd surprises! For many people, this level of control is a major plus point – there are several who believe there’s not enough ‘DIY’ in portfolio management, particularly when it comes to retirement planning. 

Another good thing about SIPPs is that you can save as you want. Instead of making regular payments into your pension, you can either choose to make smaller, regular payments or pay in lump sums spread over time instead. 

SIPPs also qualify for tax relief. Simply put, this means that the government will support you financially as you grow your pension pot. Rates may change over the years, however, so it’s always worth keeping an eye on current government figures. 

However, do always note that there are limits to the amount that you can put in and how much tax relief you can receive. What’s more, as with all government applications, honesty is key – if you embellish anything, the authorities will find out! 

a man looking into the advantages and disadvantages of SIPPs.

What Are the Disadvantages of Investing in a SIPP?

As mentioned, managing your own SIPP comes with the risk of making multiple mistakes. Of course, even professionals make mistakes regarding investments, as markets are volatile by design. That means human error – specifically, yours – could squander your retirement pot. 

However, a professional is more likely to make educated investments and manage them with confidence. As they’re emotionally removed from the process, offsetting SIPP management with advisory guidance may be a solid choice for anyone completely new to the markets. 

Another disadvantage is that while you may be well-versed in the various markets and fully capable of managing your own money, it will naturally take a lot of time for you to stack up any kind of profit. Aside from investing your money, you will also have to invest countless hours watching the markets, managing your investments, and so on.  

Even if you have a financial advisor there to help you, they will not manage your pension for you, which can make for very time-consuming work!

A Conclusion On SIPPs

SIPPs can provide a great way of saving for your retirement, and for some of us, they are preferential to everyday pension schemes elsewhere. 

However, they are time-consuming and stressful, especially for those of us who already have to focus on our full-time jobs, care, and more.  

If you are considering SIPPs, then contact as many providers as possible. They will present you with unique rates, options, and any further information you may require. You can also contact MoneyHelper who offer pension specialists you can talk to for free. 

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