SIPPs, or Self-Invested Personal Pensions, offer far greater control over your pensions and allow you to make investments that are better aligned with your risk appetite. Could they be a useful tool for building your pension around lower-risk investment options?
As we approach retirement, it makes sense to re-risk our pension pots and embrace stocks that are less prone to volatility. This can help to protect your wealth against short-term price fluctuations, helping to ensure that you’ll have access to as much money as possible when it’s time to make withdrawals.
But what if you would prefer to lower your risk exposure earlier? Or if you’re sceptical about the long-term suitability of your current pension plan?
Opening a SIPP comes with a range of benefits that you would typically associate with a pension, all with the added perk of being in more control over your pot.
Controlling Risk with SIPPs
Self-Invested Personal Pensions come with plenty of the familiar tax-efficient benefits that you would expect as part of a traditional pension pot.
The government tops up your contributions with a 20% tax relief, meaning that if you contribute £80, your deposit will be effectively increased to £100 if you’re a basic rate taxpayer.
If you’re a higher or additional-rate taxpayer, it’s possible to claim back an extra 20% or 25%, respectively, through your tax returns.
Upon turning 55 (or 57 starting in 2028), you can typically take 25% of your pot as a tax-free lump sum.
But the greatest advantage of SIPPs is the control that you have over your investments. Unlike typical state or workplace pensions, opening a SIPP means that you’re free to pick and choose the investments you make, or choose a platform that will manage them for you under your general guidance.
You’re also able to choose different equities, such as stocks, bonds, ETFs, commercial property, and even cash.
When setting up a SIPP, you can use this greater level of management to align your pension pot with your financial goals based on your chosen retirement age and contributions.
This means that you can get a hands-on approach when navigating the level of risk that you’re comfortable with.
Adding Low-Risk Dividend Stocks
The topic of risk within pensions can be a difficult subject. It’s reasonable to aspire to build your pot as much as possible, but nobody wants to be left with less than they need when they reach retirement age.
It’s for this reason that many pension providers create diversified portfolios for their clients that are more resilient against market fluctuations.
However, not all pension holders have the same risk appetite, and for many Britons, stock market investing comes with an uncomfortable level of uncertainty.
This summer, a YouGov poll found that more than half of British adults were unwilling to invest in a Stocks and Shares ISA, with 65% of respondents claiming that it would be ‘too risky.’
The notion of stock market investing casts our minds to the highly speculative tech stocks of Wall Street, which are prone to higher levels of volatility. But the world of investing is a diverse place with many different types of opportunities available to match different levels of risk appetite.
Companies that offer dividend payouts will consistently distribute a portion of their profits to investors, typically on a quarterly basis, offering pension savers a cash flow that’s more predictable than typical growth stocks.
The steady stream of dividends could also serve as a hedge against inflation while offering you the opportunity to access compounded growth as your dividends are reinvested within your portfolio.
Tax Advantages of SIPP Dividends
The biggest advantage of using a SIPP to gain access to low-risk dividend stocks is that any earnings you make through dividends won’t be liable for UK dividend tax.
All growth and income within a SIPP wrapper are sheltered from any income tax or capital gains tax until you reach retirement age and begin to withdraw your money. Until then, you’re free to get the most out of your dividends within your pension, helping to build a passive income on your terms within your pot.
If you were to incorporate dividend stocks into a traditional investment account, current taxation laws would require you to pay tax on any earnings you make directly from dividends beyond an annual £500 threshold, which is likely to be inhibitive for many investment strategies.
Managing SIPP Expectations
Self-Invested Personal Pensions are excellent if you have the time to manage your own investments within your pension’s portfolio or have special requirements based on the amount of risk that you’re willing to take on.
Although dividend stocks are great choices to add if you’re looking for investments that offer a more reliable income stream, they still aren’t immune to negative growth, and there’s always a chance that you’ll lose out on your initial investment.
Before deciding to set up a SIPP or picking the investments you want to add to your pension, it’s certainly worth getting in touch with your financial adviser if you have any doubts over your next steps.
