AJ Bell has issued a warning about common mistakes people make when using self-invested personal pensions (SIPPs), highlighting rules that could count pensioners out. The warning comes as millions of people have yet to fully understand how these pensions work, according to Sarah Coles, head of personal finance at AJ Bell.
Key rules and common mistakes
Coles explained that since their launch in 1990, SIPPs have changed significantly and now appeal to huge numbers of people looking for flexibility to take control of their pension. However, she noted that "there are still millions of people who have yet to get to grips with what they have to offer, so it’s worth exploring the most common questions and answers."
A SIPP is a type of personal pension that allows savers to choose from a much wider range of investments than many traditional pension arrangements. Depending on the provider, this can include funds, investment trusts, shares, exchange traded funds, bonds and gilts. The Government provides tax relief on contributions, helping to boost the amount invested for retirement.
Contribution limits and carry-forward
For most people, the annual pension allowance is £60,000. However, there are rules around earnings and total contributions, with payments made by an employer or someone else counting towards the allowance. Those without earnings can still receive tax relief on contributions, with a £3,600 allowance.
Under the carry-forward rules, unused allowances from the previous three years can potentially be used. But there is an important restriction: you cannot pay in more than your earnings for the year in which you are making the contribution. You must also have been a member of a pension scheme during the years from which you are carrying forward unused allowance.
Accessing your pension
SIPP savers can normally access their pension once they reach the minimum pension age. This is currently 55 but is due to rise to 57 in 2028. Once they reach the relevant age, savers have a number of options for accessing their money.
In most cases, up to 25% of a pension pot can be taken tax-free, subject to the relevant rules. The remainder can stay invested and provide an income through drawdown. Savers can also take their tax-free cash in stages rather than taking the whole amount at once.
