To SIPP or not?

jamesd

Whether ten years is enough to accumulate what you want depends on the intended use.

Defined benefit pensions normally have an actuarial reduction for taking them before the scheme's normal pension age. One common good use of DC money like a SIPP is to retire but not immediately claim the DB pension, so it suffers less of an actuarial reduction. The amount needed depends on how long it is between the two dates.

Another good use is retiring before state pension age and paying yourself your eventual state pension amount. How many years decides the amount needed.

In my last post I wrote about a 6.25% gain from using the pension instead of the ISA. There's more. Say you do both of those two things and the amount is £25,000 per year. Half of that is your income tax personal allowance so your effective income tax rate is 10% not 20%. That makes the pension use gain vs ISA £125 * 0.25 + £125 * 0.75 * 0.9 = £115.625. Instead of 6.25% the pension gain on this bit of money is 15.625% and it's still free of any extra investment risk. Who wouldn't want that extra gain just from understanding and using the advantage of pensions?

A third possible use is long term topping up of your income in retirement. Assuming you have income flexibility you'd need around twenty times the desired extra income.