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While most people agree that planning for retirement is important whatever your stage in life, knowing how to do it can be confusing. There are a range of options available to individuals seeking to build a nest egg for retirement. Workplace pensions are possibly the most straightforward. However, considering a self-invested personal pension (SIPP) or an individual savings account (ISA) could be worthwhile depending upon an individual’s personal preferences.
Simplicity
A workplace pension is probably the simplest vehicle through which to plan for retirement. An employer will often match payments into such a scheme, which clearly increases its value at a faster rate. Some employers will also pay into a SIPP. This provides an individual with a greater choice of assets in which to invest. A range of shares, funds, investment trusts and even commercial property is available to a SIPP investor. In contrast, a workplace pension scheme usually has a rather limited choice of funds available.
An ISA is a relatively simple means of investing for retirement. Unlike a workplace pension or a SIPP, contributions to an ISA are made from after-tax income. This means that capital within an ISA is unlikely to grow as quickly as it would had it benefited from tax relief. But, offsetting this is greater simplicity when it comes to making withdrawals. Any amounts withdrawn from an ISA are tax-free, and can be undertaken at any point in time.
In contrast, workplace pensions and SIPPs can only be accessed from age 55. The first 25% of withdrawals are tax-free, with the remainder being taxed at an individual’s normal tax rate. As a result, the benefit of not paying tax on contributions to workplace pensions and SIPPs is offset to at least some degree.
Decisions
Clearly, whether a workplace pension, SIPP or ISA is the best option for an individual depends on their personal circumstances. For people who wish to plan for retirement with minimal effort, a workplace pension could be the best option. As long as the funds in which it is invested are suitable given an individual’s risk tolerance and timescale, it can prove to be a worthwhile option.
SIPPs provide much greater flexibility and choice than workplace pensions. As such, they may be better-suited to individuals who wish to take a more hands-on approach to managing which assets are held within their pension. While there are costs to having a SIPP, they are unlikely to be prohibitively expensive given the flexibility that the product offers.
An ISA provides significant flexibility regarding withdrawals. This could make it more appealing for an individual who may need to access the money at some point before retirement. Since withdrawals from an ISA are not subject to tax, some individuals may also find it easier to plan the amount of income they require in retirement. And with there being a range of options in terms of assets that can be held within an ISA, it is likely to satisfy most people’s desire to manage their own pension.