Few individuals will be able to live off £164.35 per week. However, that’s what retirees receive via the State Pension. It’s less than a third of the UK’s average salary. And while retirees may not have the same level of housing costs as when they were younger, they’re unlikely to enjoy financial freedom in older age given the current level of State Pension payment.
As such, planning an alternative income in retirement should be a priority for everyone. Fortunately, it’s never been easier, or more advantageous, to do so. A Self-Invested Personal Pension (SIPP) could be one means, having the potential to boost your retirement savings over the long term.
Opportunity
With technology continuing to improve, opening and managing a SIPP is getting easier. It’s possible for an individual to open a SIPP online, with the process relatively short and straightforward in most cases. Once opened, managing a SIPP is similar to having a bog-standard sharedealing account in terms of its mechanics, with the buying and selling of a variety of assets possible at the click of a mouse.
However, the main benefit of using a SIPP to plan for retirement is its tax advantages. Amounts paid in are not subject to income tax, which means that your portfolio of investments may grow at a faster pace than amounts invested elsewhere that have already been subject to income tax.
Certainly, withdrawals from a SIPP are subject to income tax. But with 25% of withdrawals tax-free, it’s possible to avoid a significant amount of income tax from using the product. And with part of an individual’s personal allowance not used up by the State Pension, a further £3,300 withdrawn from a SIPP in income each year may also not be subject to income tax.
Clearly, tax is an individual affair, but the key takeaway is that a SIPP is generally viewed as being a relatively tax-efficient product.
Growth potential
Investing in a range of FTSE 100 and FTSE 250 shares over a long period through a SIPP could be a relatively simple means of producing impressive returns. The FTSE 100, for example, has generated an annualised total return of 4.5% in the last 20 years. The FTSE 250’s annualised return during the same period is double that figure. As such, it may be possible for individuals who aren’t yet at retirement age to build a substantial nest egg by the time they are eligible to receive the State Pension.
With there being a number of stocks which offer dividends in excess of 5% at the present time, obtaining a desirable income return in older age may never be easier. As such, and while the prospects for the State Pension seem to be downbeat in terms of the age at which it’s payable forecast to rise, investing through a SIPP could prove to be a worthwhile solution.