We know finding and retaining talent is a perennial problem. Also, as an employer, you play a pivotal role in your employees' financial well-being. If you’re located in the United Kingdom (UK) or have an employee based there, consider offering SIPPs.
What does SIPP stand for? Self-Invested Personal Pensions and offering them as part of your benefits package can be a compelling way to attract and retain top talent. A Self-Invested Personal Pension (SIPP) demonstrates your commitment to your employees' financial well-being and empowers them to control their retirement savings.
SIPPs' tax advantages and flexibility make your organization more appealing, helping you stand out in a competitive job market. In turn, this can lead to increased loyalty, reduced financial stress, and a more engaged, productive workforce, ultimately benefiting both employees and your business.
So, let's dive into what is a SIPP and why they matter.
Understanding Self-Invested Personal Pension
SIPPs, or Self-Invested Personal Pensions, provide a unique way for your employees to save for retirement in the UK. Essentially, a SIPP is a personalized pension scheme with added flexibility.
How SIPPs Stand Out
SIPPs were introduced in 1989 in the UK as a response to changes in the way people work and save for retirement. They were created to provide an alternative to traditional company-sponsored pensions, similar to the 401(k) plan in the US.
SIPPs offer more flexibility and control over retirement savings. With a SIPP, your employees can choose and manage their investments independently or seek guidance from a trusted financial adviser. This level of flexibility means they can change their investments whenever it suits them.
SIPPs offer a wide range of investment options approved by Her Majesty’s Revenue and Customs (HMRC) in the UK, including
- Stocks and shares: This includes company shares both in the UK and abroad
- Cash ISAs: A tax-efficient savings account
- Corporate bonds: Bonds issued by corporations
- Government bonds: Bonds issued by governments
- Investment funds: Including unit trusts (UTs)
- Open-ended investment companies (OEICs): A type of investment fund
- Investment trusts: Another investment avenue
- Real estate investment trusts (REITs): Investments in real estate properties
- Exchange-traded funds (ETFs): Investment funds that trade on stock exchanges
It's important to note that while SIPPs offer various investment avenues, however, most houses are not eligible for investments in the UK. Additionally, the availability of these investment choices may vary depending on the SIPP provider you choose.
This flexibility and range of investment options in SIPPs are designed to adapt to the changing landscape of retirement planning, where lifetime careers and final salary pensions have become less common.
Employers can offer SIPPs to their employees as part of their benefits package or contribute to their employees' existing SIPPs. Regardless of your route, it’s important to understand the nuances of pension and tax rules in the UK. So, let’s break them down even further.
Types of SIPPs
There are a few different types of SIPPs available in the UK.
Full SIPPs
Full SIPPs are like a buffet of investment options, offering your employees a wide selection of assets to include in their pension portfolios. The possibilities are extensive, from bonds and company shares to more complex investments like unlisted shares and derivatives. However, with the ability to make their own investment decisions come higher fees.
Simple SIPPs
Simple SIPPs strike a balance between flexibility and simplicity. They offer a range of investment options, including stocks, bonds, government bonds, and various funds, providing your employees with the freedom to build a retirement portfolio that suits their needs without overwhelming complexity.
Ready-Made SIPPs
For employees who prefer a hands-off approach, Ready-Made SIPPs are the perfect solution. These plans come with a pre-designed pension pot managed by financial experts, ensuring a stress-free retirement planning experience.
Navigating SIPPs in the UK
While SIPPs provide more control, there's an element of risk involved. The money your employees invest in a SIPP can go up or down in value, similar to a seesaw, and the financial market can be unpredictable.
SIPP pension rules and taxes also depend on individual circumstances and may change over time. So, staying informed about these rules is crucial.
One more thing to keep in mind: Your employees usually can't access the money in their SIPP until they're at least 55 years old (or 57 starting in 2028). That's why careful retirement planning is essential.
Overall, employees must understand the risks associated with SIPPs, stay updated on the rules, and plan for when they can access their money. Encouraging informed retirement planning among your employees can be a valuable part of your benefits package.
What Happens When You Invest in a SIPP?
When you invest in a SIPP, you don't need to pay tax on the portion of income you invested or the capital gains you earn. This tax advantage is one of the key benefits of SIPPs. It means that any income or capital gains generated within SIPP investments, such as dividends from stocks or capital gains from selling investments, are not subject to UK tax while they remain within the SIPP.
This tax-efficient growth allows retirement savings to potentially grow faster than if they were held in taxable investment accounts, helping to accumulate a larger pension fund over time.
However, it's important to note that while savings grow tax-free within the SIPP, it's not a tax-free lump sum. Typically, a SIPP will be subject to taxation when funds are withdrawn during retirement. The specific tax treatment of SIPP withdrawals depends on individual circumstances and the prevailing tax rules at the time of withdrawal.
Overall, investing in a SIPP provides a tax-efficient way to grow retirement savings, but it's essential to consider the tax implications when pension funds are eventually accessed.
Can My Employees Move Their Workplace Pension Contributions to Their SIPPs?
Yes, your employees can inquire about redirecting their workplace pension contributions to their SIPPs.
This can streamline their retirement savings and offer them greater investment control. They can choose between monthly contributions or a lump-sum transfer. To explore this option, discuss it with your employees and ensure it complies with your company's pension policies and rules.
How Many SIPPs Can Our Employees Have?
There is no specific limit on the number of SIPPs your employees can have. However, it's important to note that there are annual and lifetime limits in place that govern how much individuals can save tax-efficiently in their pensions.
As an employer, it's a good practice to inform your employees about these limits to help them make informed decisions about their retirement savings.
Employees can have multiple pensions concurrently, including a SIPP alongside any workplace or personal pensions, whether with your organization or another pension provider.
This flexibility allows them to choose from various pension types, such as legacy-defined benefit schemes, defined contribution schemes, or stakeholder pensions, to accommodate their diverse retirement savings needs and preferences.
How Much Can Employers Contribute to an SIPP?
As an employer, you might wonder about the limits on contributing to your employees' SIPPs. The good news is that there's no official SIPP employer contribution limit. You and your employees can determine the contribution amount together, but there are important guidelines to consider.
The maximum yearly pension contribution allowed for an individual is 100% of their earnings, up to a maximum of £60,000 per year. There is also a lifetime allowance limit. Contributions exceeding this limit won't receive tax relief, and any previously granted tax relief may need to be repaid.
It's essential to remember that all contributions, whether from the employee, employer, or tax relief, count towards this limit. The entire amount is considered an employer contribution if salary sacrifice is used for pension contributions.
Furthermore, employees can carry forward any unused allowance from the previous three tax years, but they still can't contribute more than 100% of their earnings in a single year. As an employer, understanding these rules can help you and your employees make well-informed decisions regarding SIPP contributions.
Can Employees Control Their SIPP Contributions?
When your employees retire, they have several choices for managing their SIPPs. They can opt for an annuity, use income drawdown to receive pension payments while their savings keep growing, or take lump sum withdrawals from their SIPPs. This flexibility empowers them to customize their retirement income.
Furthermore, employees have significant control over their SIPP contributions. They can determine both the contribution amount and frequency, whether through regular payments or lump sums.
Additionally, employers can contribute to their employees' SIPP accounts, bolstering their overall retirement savings strategy. This level of flexibility and employer support enhances financial planning for retirement.
Are Lump Sum Contributions Allowed?
Lump-sum contributions to SIPPs are permitted. Employees can make lump-sum deposits into their SIPPs, and while many providers offer online processes for this, contacting the pension provider to complete a form is also an option. This provides employees with the versatility to make additional contributions as needed.
What Is the Tax Relief on SIPP Contributions?
SIPPs offer significant tax benefits, making them an attractive choice for retirement savings. When employees contribute to their SIPPs, the government provides tax relief, usually at a rate of 20% or higher for those in higher tax brackets. This tax relief enhances retirement savings substantially.
The relief is generally applied at the basic-rate income tax level, with specific conditions. For example, if an employee contributes a lump sum of £2,000 to their SIPP, they receive a government tax relief of £500, resulting in a total SIPP investment of £2,500.
Higher-rate and additional-rate taxpayers can claim even more substantial tax relief, further incentivizing retirement planning. Tax relief rates may vary for Scottish residents, and annual contribution limits are in place.
SIPPs and Workplace Pensions: What Are the Options?
Employees have the option to hold both a SIPP and a workplace pension simultaneously. In cases where employers match additional contributions made to workplace pensions, prioritizing contributions there is typically advisable, as the employer's contributions significantly enhance retirement savings.
However, if employees are considering a SIPP to make extra contributions beyond their workplace pension, it's important to compare the costs and charges involved. This comparison ensures that the chosen pension strategy aligns with their long-term financial objectives, making informed retirement planning a vital aspect of their financial well-being.
How Do You Choose a Reliable SIPP Provider for Your Employees?
For employers in the UK, offering SIPPs to their workforce is a valuable addition to their benefits package.
Employers have several options when it comes to offering SIPPs to their employees, and there are ways for employees to provide their SIPP account details to their employers.
Employer-Initiated SIPPs
Employers have a chance to improve their employee benefits packages by including SIPPs as an option for retirement savings. To do this, they can partner with a trusted SIPP provider to make this pension plan available to eligible employees.
Effective communication is vital. Employers should inform their employees about the new SIPP offering, explaining its benefits and how it works alongside existing pension plans.
Employees who are interested in the SIPP can choose to participate by providing their SIPP account details and specifying how much they want to contribute and where they want to invest their money.
Employers can also decide to contribute to their employees' SIPPs, either by matching what employees contribute or by providing a fixed amount. These contributions can be tailored to suit employee preferences and company policies, offering a flexible and accommodating retirement savings option.
Employee-Initiated SIPPs
When some of your employees already have their SIPP accounts set up before joining the company, they should let you know about these accounts. To make it possible for you to contribute, employees just need to share their SIPP account details, like the provider's name and account number.
Once you have these details, you can simply complete the employer contribution forms. Usually, this is done through bank transfers or some other method both parties agree on. It's important to make sure these contributions fit within the yearly tax limits to keep things tax-efficient for everyone.
By following these simple steps, employees and employers can use SIPPs as part of the company's retirement savings options.
In both scenarios, choosing a reliable and regulated SIPP provider is crucial to safeguard employees' investments. Employers should also proactively educate their workforce about the advantages of SIPPs, emphasizing the flexibility and control they offer over retirement savings.
Ultimately, offering SIPPs or accommodating employees' existing SIPPs can significantly enhance an employer's benefits package and contribute to attracting and retaining top talent. It empowers employees to take control of their retirement planning, aligning with the evolving priorities of today's workforce.
What Costs Should Employers Consider When Selecting a SIPP Provider?
When looking at SIPP options for your employees, it's essential to take into account various costs from an employer's perspective. These costs can impact your employees' retirement savings and the overall attractiveness of the SIPP offering.
Here are some key considerations:
- Set up fees when opening an account
- Annual fees
- Dealing charges (applied when buying or selling investments)
- Drawdown fees (related to withdrawing money from your employees' pensions)
- Exit fees (in case your employees decide to switch pension providers)
Additionally, you'll have to cover annual fees for any investment funds your employees use within the SIPPs. While these fees are often similar across all SIPPs, some providers may negotiate lower fees for specific funds.
It's important to note that the impact of these costs varies based on the size of your employees' pension savings. Smaller pension balances might find that the cheapest SIPPs come with higher costs, while larger balances may experience the opposite.
As an employer, understanding and managing these costs is crucial to offering an attractive and financially beneficial SIPP option for your employees.
Connect with Borderless
Whether you’re hiring in the UK or already have a team based out of there - it’s important to understand SIPP pension rules. If you need a helping hand - get in touch. Our team of experts will walk you through the process of setting up a SIPP for your team or contributing to their existing SIPP.
Or, if you’re interested in hiring talent from the UK or abroad, we can help. We have an Employer of Record (EOR) in the UK and in 170+ countries worldwide. Borderless offers an easy, hassle-free approach to international hiring.
To learn more, reach out to our team.
Disclaimer: Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
