News headlines last week suggested that the State Pension age could rise to 75 over the next 16 years. It made for grim reading if you were hoping to retire sooner.
Luckily, it turned out that this isn’t a new government policy. Instead, the idea of retiring at 75 came from a proposal put forward by a conservative think tank, the Centre for Social Justice.
Current government policy is to increase the State Pension age to 68 by 2046.
But leaving politics aside, it seems pretty clear to me that the retirement age is only likely to keep rising. I’ll be surprised if I’m able to claim the State Pension before I’m 70.
One problem with this is that not everyone is able to work until they’re 70 or beyond. In many cases, health problems or other issues make this impossible. That’s why I think it’s important to make some additional private arrangements for a retirement income.
SIPP solution?
Luckily, a few minutes spent putting arrangements in place today could provide you with a useful pension in future years.
Remember, under current rules, you can start accessing your pension pot when you’re 55. Investing in a personal pension now could help you retire much earlier, without needing to worry about the State Pension.
For private investors, I think the best pension choice is probably a Self-Invested Personal Pension, or SIPP. This is an investment account that has all the usual features of a private pension, but which allows you to manage your pension investments yourself.
Benefits of a SIPP
Just like a regular pension, payments made into a SIPP benefit from income tax relief. If you’re a basic rate taxpayer, the government will pay in an extra 20% of tax relief on top of the payments you make. If you’re a higher-rate tax payer, you’ll get additional tax relief.
Money in a SIPP isn’t liable to capital gains tax or income tax. Under current rules, you’ll be able to withdraw up to 25% of your pension fund tax-free when you’re 55. Further withdrawals from your pension will be subject to income tax, as with other types of pension.
What should you put in a SIPP?
SIPPs are fairly flexible. You can hold a wide range of financial investments, such as funds, government bonds and individual stocks and shares. It’s also possible to hold commercial property in a SIPP.
As a keen stock market investor, I believe the best way to invest money in a SIPP is in shares and stock market funds.
A simple way to get started is by putting cash into a FTSE 100 tracker fund, either with a lump sum or through automated monthly payments. This should be a cheap, simple investment that will produce solid long-term returns.
Remember, over the last century, the UK stock market has returned an average of about 8% per year.
Another option is to invest your pension cash in dividend stocks which have the potential to deliver reliable returns over many years. This is what I do in my SIPP. By reinvesting my dividends I can top up my holdings.
And when I reach retirement age, I’ll be able to start withdrawing the dividend income, without having to sell any shares.