SIPP help please for a nervous novice

c'est_moi

Good morning. I am after some advice please.

I retired early two years ago- (hooray!) - and have four more years until I can access my DB pension. The plan was to live off my partners salary, savings, and any PT, short term work I could get when needed. So far it has all gone very well. This year I will earn about £6K, from which I intend to make up some of the years shortfall on my NI.

I have been advised several times than taking out a SIPP in my situation would be a 'no brainer', but frankly until now I have ignored that advice as I have lost money trying to invest before and I have that gut feeling that if the money is in savings accounts in the bank at least I know how much is there and that it cannot be lost. However, it has also clear than my savings are losing money in real terms due to dire interest rates and rising inflation.

So, after doing nothing for two years I have decided that it would be stupid not to listen to the advice and put some of those savings into a SIPP, but despite reading around the topic I still feel stupidly uninformed. I think I would probably go with a Vanguard SIPP. My understanding is that I can pay in a lump sum of £2880 and to this will be added £720 in tax relief. I can do this every year, for as long as I can afford to, or presumably perhaps a future government changes this system?

My question then is how does it work at the other end - getting money out? Can it be withdrawn all at once, or in chunks of money? As I may only pay into this for say five years I don't see this as something that I would draw on as a monthly income - the amount it would pay out would be tiny. Or am I missing the point entirely?

One last - and big concern for me - this is an investment, not a savings scheme? The money I pay in may be less that the money I get out? I have lost money on investments in the past and it makes me very wary. Thanks in advance for anyone who is able to clarify things for me. When I describe myself as a novice at all of this I was not kidding!

Audaxer

Firstly, just to mention that it is possible to put £2,880 into a SIPP, leave it as cash, and once the tax relief is added, withdraw the full £3,600 without paying any tax and repeat each year. That assumes you are over 55 and have no earnings. There is a good, long-running thread on this forum which is worth a read:
Paying £2880 into pension when retired - Page 123 — MoneySavingExpert Forum

macman

As above. Do this and it effectively becomes a savings account paying 20% p.a. with no risk to the capital.
Investments in the stock market should be seen as long term, and you should not be considering withdrawing the funds in less than 5 years. If you are twitchy every time the FTSE drops a few points, then investing is not for you.

Dazed_and_C0nfused

c'est_moi said:

Good morning. I am after some advice please.

I retired early two years ago- (hooray!) - and have four more years until I can access my DB pension. The plan was to live off my partners salary, savings, and any PT, short term work I could get when needed. So far it has all gone very well. This year I will earn about £6K, from which I intend to make up some of the years shortfall on my NI.

I have been advised several times than taking out a SIPP in my situation would be a 'no brainer', but frankly until now I have ignored that advice as I have lost money trying to invest before and I have that gut feeling that if the money is in savings accounts in the bank at least I know how much is there and that it cannot be lost. However, it has also clear than my savings are losing money in real terms due to dire interest rates and rising inflation.

So, after doing nothing for two years I have decided that it would be stupid not to listen to the advice and put some of those savings into a SIPP, but despite reading around the topic I still feel stupidly uninformed. I think I would probably go with a Vanguard SIPP. My understanding is that I can pay in a lump sum of £2880 and to this will be added £720 in tax relief. I can do this every year, for as long as I can afford to, or presumably perhaps a future government changes this system?

My question then is how does it work at the other end - getting money out? Can it be withdrawn all at once, or in chunks of money? As I may only pay into this for say five years I don't see this as something that I would draw on as a monthly income - the amount it would pay out would be tiny. Or am I missing the point entirely?

One last - and big concern for me - this is an investment, not a savings scheme? The money I pay in may be less that the money I get out? I have lost money on investments in the past and it makes me very wary. Thanks in advance for anyone who is able to clarify things for me. When I describe myself as a novice at all of this I was not kidding!

You have grasped some things ok but are a bit off with others.

Firstly if you earn £6k you may well earn a significant chunk of an NI year and only need to make a small voluntary contribution for 2022:23 to count towards your State Pension.

I know your post isn't about the State Pension so I'm assuming you understand that you are under transitional rules and having 35 years is not relevant to you.  If you haven't read your State Pension forecast in full then I suggest doing so would be a good idea.

The £2,880/£3,600 amounts are only relevant to those not earning or only earning up to £3,600.  If your £6k figure turns out to be accurate then you could pay £4.8k (net) if you wanted to and get £1.2k added in basic rate tax relief giving you a gross contribution of £6k.  The fact you won't have paid any tax is irrelevant.  Remember you need to factor in your auto enrollment contributions when working out what you can contribute to a SIPP.

Also, it doesn't need to be a lump sum, you can pay something monthly or on an ad-hoc basis if you want.

There are a lot of options when taking the money out but two common ones are to take the 25% TFLS (and tax free lump sum does mean tax free) and take the rest in one go.  Or you could take the 25% TFLS as part of each payment.  

You could also buy an annuity but that is less common nowadays and probably not best suited to such a (relatively) small pot.

Assuming an annuity isn't of interest then the most tax efficient way is to take the taxable element in a tax year(s) that you have unused Personal Allowance.

So you pay in say £14,400 over 5 tax year which becomes £18,000 with the basic rate tax relief added and you then manage to get £4,500 out as a TFLS (in one go or stages) and take the remaining £13,500 out without paying any income tax.  Nice profit, before any pension scheme charges, of £3,600.

If you don't fancy investing the money within the pension wrapper you still risk a loss to inflation but you as Audaxer mentions there is useful thread about people who are doing this on a year by year basis so they get the (increased) money back and invest it elsewhere.  Which could work for you if you are at least 55 as you seem to have unused Personal Allowances.

Dazed_and_C0nfused

macman said:

As above. Do this and it effectively becomes a savings account paying 20% p.a. with no risk to the capital.
Investments in the stock market should be seen as long term, and you should not be considering withdrawing the funds in less than 5 years. If you are twitchy every time the FTSE drops a few points, then investing is not for you.

To be honest it's paying 25% 😊

For every (qualifying) £100 you contribute the pension scheme adds £25.

Albermarle

macman said:

As above. Do this and it effectively becomes a savings account paying 20% p.a. with no risk to the capital.
Investments in the stock market should be seen as long term, and you should not be considering withdrawing the funds in less than 5 years. If you are twitchy every time the FTSE drops a few points, then investing is not for you.

Not really accurate to say it is like a savings account, where you gain interest on the whole amount in there each year.

You gain 25% on the initial contribution, but zero ( or close to zero) in subsequent years if you leave it in there. So if you left it there 5 years, you would get on average 5% pa.

Albermarle

One last - and big concern for me - this is an investment, not a savings scheme? The money I pay in may be less that the money I get out? I have lost money on investments in the past and it makes me very wary. Thanks in advance for anyone who is able to clarify things for me. When I describe myself as a novice at all of this I was not kidding!

A SIPP ( or any DC pension) is usually for building up a retirement pot long term. So all recommendations is that the money in the pension should be invested and not kept as cash. Despite your experience, history shows that in the long term investments go up beyond inflation.

However your situation is different as you are not really looking at long term and as mentioned in other posts, it will probably be best to keep it in cash, especially as you are nervous about investments.

A_T

you could also look into which SIPP platform pays the best interest on cash after the platform fees.

I contacted Vanguard about this recently and had this reply:

" With the Bank of England rate at 1.25%, Vanguard does currently pay 1.0% interest on cash held, this accrues daily and is paid monthly to your Vanguard account in arrears.

You will be able to see any interest under 'Transactions' > 'Cash statement'.

Please note that all holdings in your Vanguard account are subject to our 0.15% account fee, and this includes any cash that you hold. The account fee is calculated daily and charged quarterly."

every little helps!

lucyandthomas

I think you can do this every year until you’re 75 - may be wrong, so will wait to see if someone corrects me.

c'est_moi

Thank you all so much - that's very, very helpful. I am 51, so I would be looking at four years until I can access my DB pension.

Regarding the NI - I am five years short and yes, I have contributed some NI this year through PAYE and hope to make up the shortfall with voluntary class 3 contributions as I worked very briefly as an exam invigilator and as I understand it I can make contributions without having to register as self employed. I think I only need to make about £100 contributions this year to make up the difference.

I didn't realise I could put more into a SIPP this year as I have some earnings - I will certainly do that. Who knows if I will earn anything after this year, but going to the max I can this year would be a great start. I am not contributing into any pension scheme at all currently - I opted out of the auto enrol as I just don't think I would be earning enough to build up any kind of a useful pot there.

I also didn't understand that I could have an entirely cash SIPP - that sounds ideal for me.

All of this has given me a lot to think about. Many thanks.

QrizB

c'est_moi said:

I opted out of the auto enrol as I just don't think I would be earning enough to build up any kind of a useful pot there

Too late now, but it might be useful in future - opting out of auto-enrollment means you'll have missed out on employer's contributions, which is effectively giving yourself a pay cut.

If you opt in you'll get those contributions, and can then leave them in place or (if you prefer) transfer them in to your SIPP.

c'est_moi said:

Thank you all so much - that's very, very helpful. I am 51, so I would be looking at four years until I can access my DB pension.

Four years is an awkward length of time. It's long enough that the 25% tax relief only works out as 6.25% per year, which (if you keep the SIPP in cash) could be eroded by inflation; but at the same time, it's quite a short time in investment terms and if you choose an investment fund it could fall over that period.