The State Pension is gradually becoming less affordable. Even though it stands at just £164 per week, an ageing population and longer life expectancy mean that its overall affordability for the state may become increasingly limited in future years. This could mean that the age at which it is paid continues to increase so that it is payable only in the latter part of an individual’s retirement (as it was when it was originally introduced).
As a result, assuming that the State Pension will provide a sizeable chunk of the income required by an individual in retirement may be a mistake. This means that planning for retirement may move into sharper focus for a wide range of individuals, with a SIPP being an obvious means of generating the required level of retirement saving over the long term.
SIPP appeal
A SIPP is a relatively straightforward means of saving for retirement. It provides an individual with control over where their money is invested, and could be a worthwhile option for people who wish to have greater flexibility than an employer pension. The latter normally has a limited range of funds from which an individual can choose, while a SIPP offers access to an array of asset classes.
Of course, a SIPP offers significant tax advantages in the long run. For basic-rate taxpayers, a £100 contribution to a SIPP costs just £80. For higher-rate taxpayers, the figure is just £60. This means that there is a clear incentive to save for retirement from a tax perspective, with up to 100% of annual earnings being eligible as a contribution to a SIPP, up to an annual limit of £40,000.
A SIPP offers the opportunity to make withdrawals at any point beyond the age of 55. As with an employer pension, 25% of the amount is tax-free, with the remainder being subject to tax. This provides much more flexibility than the State Pension, where the retirement age is set to increase to 68 in the long run according to current government policy.
Practicalities
With the advent of the internet, managing a pension has become much easier. An online SIPP may not look or feel hugely different to a standard sharedealing account for a user who is seeking to buy or sell shares. And with charges for SIPPs being relatively low, they are unlikely to eat significantly into the total return – especially if an investor takes the time to shop around before opening one.
Ultimately, a SIPP requires more work than an employer pension or, indeed, the State Pension. An individual must be able to decide where to invest for the long term, with their retirement savings being wholly dependent on their own decision-making. But with the FTSE 100 appearing to offer a number of worthwhile opportunities and the internet providing a range of information about stocks, a SIPP could be a sound means of planning for the possibility of the demise of the State Pension over the long run.
