November 29, 2022
Do You Need a SIPP & What are the Withdrawal Rules?
Table of contents
Key Features to Look for in an
Investment App for Beginners in the UK
Investment App for Beginners in the UK
Introduction
Using a Self Invested Personal Pension to accelerate retirement savings
Introduction
SIPPs (self-invested personal pensions) have been around since 2005 and are a great way to save for retirement. But wait, you're already contributing to your workplace pension - why do you need another one? This is a particularly relevant question to ask for those who are saving beyond their workplace pension (which is hopefully almost everyone), and are stuck between contributing to their ISA, or opening another pension. Both are for the long term, so which makes more sense?
To go one step further, do you even need a SIPP? What are the SIPP withdrawal rules? And how do they differ from traditional pensions?
In this post, we will discuss SIPPs and their benefits, as well as the rules governing withdrawals, so you can make an informed decision.
What are SIPPs and what are their benefits
SIPP stands for Self-Invested Personal Pension.
It is a pension scheme that allows the individual to make their own investment decisions within a set of rules laid down by HMRC. As the name suggests, you have much more autonomy over what happens to your money inside the pension, than a workplace pension where you choose from a set of pre-assigned investment choices.
The main benefits of having a SIPP are:
- You have control over where your money is invested
- You have pension freedoms in what you invest in- there are a wide range of assets, including stocks, bonds, and property
- SIPPs usually have lower fees than other pension schemes
- You can access your money using income drawdown from the age of 55 (this may change in the future)
What you want to do with the money you're saving will largely dictate where it goes - a general rule is that pensions are tax-free on the way in (as your contributions are made before income tax has been deducted from your pay check) whereas ISAs are tax-free on the way out (you contribute to them from your payslip before income tax, but can make unlimited withdrawals without paying capital gains tax). This is important. There sadly aren't any options that are tax free on the way in and out - that would be too easy.
What are the SIPP withdrawal rules?
So, as with any defined contribution pension (where you make regular contributions), you can officially start taking money out of it aged 55. That being said, you have no obligation and by no means have to start withdrawing money as soon as you reach the eligible age.
You can actually continue to make contributions that benefit from tax relief until age 75, all while your pot continues to grow.
Note also that the date you choose to withdraw money has no official link to your retirement date: you can start drawing down on it before you officially retire, as long as you're passed the age of 55.
Also note that from 2028 onwards, the government plans to raise the age at which you can access money in your SIPP to 57, given the rising trend in retirement age. Keep an eye on changes in SIPP withdrawal rules to be sure on what might affect you.
Are there any penalties for withdrawing money early?
Depending on your pension provider, you may be able to withdraw money from your SIPP early. However, do note that there are usually penalties for doing so. If you just want early access to your money, you're likely to be charged a punitive withdrawal fee by your provider. In addition, you'll also face an eye-watering 55% tax rate on the withdrawal amount. So, best avoided really.
Exception: medical grounds.
If you have medical grounds for early retirement, most providers will allow you to withdraw from your SIPP without penalty - the 55 retirement age no longer applies, and you will be able to make withdrawals as if you were past this age. Specific details vary between providers. In the absolute worst case that you are diagnosed with a terminal illness, you may be able to take it all out as a lump sum.
How much money can you withdraw from a SIPP?
So, you've turned 55. What are the SIPP withdrawal options?
Well, the first 25% of the money you withdraw will be tax free, and you can chose to take this either in one lump sum or in instalments.
Following that, the remaining 75% will be available for withdrawal at standard marginal tax rates, as if it were regular income.
If you choose not to take out a tax free lump sum all in one go; the first 25% of your next withdrawals will be tax-free. The advantage of this is that the 25% continues to grow as it isn't being liquidated - although of course this means that it is subject to investment risk.
Once you have taken this 25%, as a tax free lump sum or in instalments, your pension has become what's known as "crystallised."
Crystallising your pension scheme is the process of selling the investments in the stock market that make up your pension contributions and are allowing your money to grow.
You then have a number of withdrawal options as to how to take the remaining 75%, which will be liable for tax.
- Income drawdown: an income drawdown plan is one option for SIPP withdrawals, where part of your money remains invested and is received in part as income- this is known as either income withdrawal or more commonly income drawdown. Of course, this means you need to assess the risk profile of your assets - it will remain subject to market volatility and so needs to be uninvested with ample time for withdrawal, to avoid the risk of liquidating required assets during a market downturn.
- An annuity: This is a product that enables you to get payments in yearly or monthly instalments, meaning you will continue to receive money in a similar fashion to a salary.This can be beneficial as you will know the amount of money from your SIPP fund you will be receiving, as you determine- based on the amount saved within the pension pot, what your 'retirement income' will be. If you have health issues you may be eligible for a higher payment rate. If you happen to pass away before receiving the contents of the whole fund, it can continue to be payed to whoever you have selected.
- Full cash-in: as you might have guessed, the final option is to take the entire fund in one lump sum. Now, this is not an option that is always offered so be sure to check the small print of your provider. It may also come with small penalties, and as mentioned above, will be taxed at your marginal income tax band. This is arguably not the most optimal way to withdraw from your SIPP fund, as depending on how large the pot is, you could find yourself giving up almost half the sum.It is always a good idea to talk to your financial adviser before making any decisions on how you are going to go about withdrawing your funds, as most of the time decisions will be irreversible- and you want to be in the best financial circumstances you can!
SIPP Options
Let's say you choose to open a SIPP in the UK: what are your options?
We've rounded up the top 5 providers, and what they're most well known for. Those with larger portfolios will want to avoid % fee based options which become irritatingly large on large accounts, and stick to platforms like interactive investor which offers flat rate platform and transaction fees.
Note also that of these, Vanguard is the cheapest but also the only one which limits you to investing in its own funds: fine for those who are only interested in the low-cost index funds which made it famous, but not so much for everyone else. Some of these also offer deals if you have an ISA with them already, so note this when making your decision.
It is possible to change down the line, but there may be transfer penalties for doing so. Be aware! As always, don't forget to read all the fine print and try and have some forethought about what you might do with your holdings in the future.
Why Use Investing Apps in the UK
The UK has seen a boom in investing apps in recent years, which offer beginner investors an easy to use and accessible option to get into the market.
Investing is now simpler than ever thanks to these applications, which get rid of the need for pricy brokers or complicated procedures. Investing apps like Trading 212, Freetrade, and Revolut make it possible for young and beginner investors to take control of their investments with their user friendly interfaces, built in educational tools and minimal or no costs.
As the need for low cost investing options and financial independence continues to grow, the UK is expected to utilise mobile investing tools even more in 2025. More people in the UK are using apps to manage their money as a result of its adaptability, simplicity of use, and the growing trend towards digital financial solutions and increased awareness of personal financial planning, which makes investing apps an effective tool for beginner investors.
Investing is now simpler than ever thanks to these applications, which get rid of the need for pricy brokers or complicated procedures. Investing apps like Trading 212, Freetrade, and Revolut make it possible for young and beginner investors to take control of their investments with their user friendly interfaces, built in educational tools and minimal or no costs.
As the need for low cost investing options and financial independence continues to grow, the UK is expected to utilise mobile investing tools even more in 2025. More people in the UK are using apps to manage their money as a result of its adaptability, simplicity of use, and the growing trend towards digital financial solutions and increased awareness of personal financial planning, which makes investing apps an effective tool for beginner investors.
Benefits of Using Investing Apps for Beginners
There are a number of advantages to using investing apps for beginners, particularly for those who are just getting started. Here are a few main benefits:
- Accessibility - By providing a straightforward, mobile friendly platform that is available at anytime and from any location, investing apps have completely changed how individuals invest. You no longer have to spend hours learning complicated systems or setting up sessions with financial experts. Beginners can begin investing directly from their smartphones with a few taps. Anyone, regardless of their schedule or location, can participate in investing without any obstacles thanks to this immediate access.
- Low cost - The affordability of investment apps is one of their most notable benefits. The high commissions and administration costs associated with traditional broking services make it challenging for those starting out to invest small amounts of money. On the other hand, a lot of investment apps provide cheap fees or commission free trading, which makes them perfect for beginners. This enables beginners to invest without fear of losing a significant amount of their profits to fees, allowing them to give more money to the market.
- Adaptability - Traditional investment strategies are not as flexible as investing apps. Beginners can more easily dabble without making a significant upfront payment because many investment platforms enable users to invest in a variety of assets, stocks and shares, exchange traded funds (ETFs), and specialised investment options, allowing beginners in the UK to diversify their investment portfolios right away. Furthermore, everyday investors may manage their investments on their own terms and are not restricted to a 9 to 5 schedule thanks to the option to trade at any time and from any location.
Investment apps are a great place for beginner investors to start because they combine low-cost solutions, user friendliness, and convenience to help gradually increase wealth.
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Key Features to Look for in an Investment App for Beginners in the UK
It's crucial to search for features that can features that can facilitate your learning and make investing simple and accessible when selecting an investment app as a beginner. Here are some essential features to look out for:
- East to use interface
The design of the app should be simple and intuitive. You will find it easier to comprehend and utilise the platform without feeling overwhelmed if it has a straightforward and uncomplicated layout. - Educational Resources
The best investment apps include educational materials such as FAQs, videos, tutorials, and articles. Beginner investors can use as a guide to understand important investment strategies and make wise choices. - Platform fees
A lot of investment apps charge management fees and trading fees. To protect your investment gains, it's crucial for beginners to select an investment app with little to no costs. The best investment apps waive management fees or provide zero commission trading. - Low minimum investment
For beginners who might not have a large initial investment, apps that let you start investing with small amounts of money are excellent. Also look for apps that sell fractional shares, so you can invest in pricey stocks without having to purchase the entire share. - Portfolio diversification tools
Seek for investment apps that provide a variety of investment options, including mutual funds, index funds, and exchange traded funds (ETFs). Even with little money you can create a diversified portfolio by making a fractional investment in individual stocks. - Robo-Advisor Features
Some investment apps include robo-advisors which automatically manage your investment portfolio according to your goals and risk tolerance. For those whose may not feel comfortable choosing their own investments, this is a fantastic benefit. - Security features
It is important to ensure that the app has strong security features like encryption, two-factor authentication, and safe account recovery methods to protect personal data and information. - Current market data
The best investment apps have real time market data, charts and stock market performance metrics which are essential for beginners who wish to remain informed and make wise judgements. - Type of investment accounts
There are many types of investment accounts available, such as investment accounts for minors, individual retirement accounts and individual taxable accounts. You should choose an investment app that provides you with a range of account options that can help meet your financial objectives.
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