There’s no rocket science to financial security in retirement. Nor does it depend on excessive risk-taking, or a fat salary, or luck – though admittedly the latter two can help. The real key lies in understanding and making the most of your pension. Here we look at what you need to do to give yourself the best chance of retiring in comfort.
Start early
Timescale is arguably the single most important factor in building a pension that will support the kind of life you want to live after you stop working. Retirement can be a pretty nebulous concept when you’re living in the moment in your 20s and 30s, but the earlier you engage with the idea of a pension and start to think about building it, the better.
That’s because an early start not only means more years of contributions but extra decades for your investment to benefit from compound growth, whereby reinvested earnings buy additional investment units that themselves produce more of the same, and so on.
Certainly, state pension alone will not support more than the most frugal of lifestyles. For the tax year 2025/26, the state pension is £230.25 a week1 (marginally under £12,000 a year) – just 31% of current average weekly earnings in the UK2.
Of course, most employees are automatically contracted into a tax-efficient workplace pension that will eventually pay them an income, hopefully forming the larger part of their retirement planning; the state pension can then act as a valuable ultra-secure, inflation-linked core for their finances in due course.
If you are eligible for a workplace pension scheme, it’s a no-brainer to be a member, for the simple reason that on top of your monthly contributions you’ll receive at least 3% of your qualifying earnings from your employer3; some are considerably more generous.
But there are various circumstances in which a self-invested personal pension (SIPP) could be just what you’re looking for – most obviously if you’re self-employed or are keen to supplement your occupational pension or consolidate pensions from past employers.
SIPPs vs. workplace pension schemes
SIPPs offer the same advantages as workplace pensions, in that you get full tax relief on your contributions - whether lump sums or regular payments – up to a total of £60,000 each year4 (across all contributory pensions). This makes them particularly attractive for higher and top rate taxpayers who can claim 40% or 45% tax relief on their payments.
Your pension investments then grow completely tax-free over the years; importantly, given their intended use, you cannot touch them until you reach age 55 (rising to 57 from 6 April 2028).
As and when you do reduce your working hours or retire, you can take up to 25% of your pension pot tax-free, with the rest paid out and taxed as income in the usual way. (For most people in retirement that may mean basic rate tax, even if they were higher earners during their working life, which further strengthens the tax attractions.)
However, there are important differences between the two pension types. No employer is involved in setting up or running your SIPP, so there is of course no employer contribution. And crucially, rather than paying into a managed scheme, you make the investment choices yourself.
That might sound a daunting prospect, but it need not be. SIPPs can be set up through a financial adviser, or easily and cheaply on user-friendly, whole-of-market investment platforms, which offer research, generic guidance, investment ideas and recommendations.
Moreover, while the ball is in your court as far as choosing, monitoring and managing your pension investments is concerned, SIPPs are extremely attractive in terms of flexibility, control and genuine choice across the investment spectrum.
Choosing your SIPP investments
If you’re starting to build a SIPP, the key is to keep things simple. For example, you could choose one or two well-diversified, competitively priced funds run by respected managers with a long-term investment perspective, such as J.P. Morgan Investment Trusts.
Investment trusts can work really well in this context. Their structure means that they tend to outperform conventional open-ended investment funds in most sectors5, particularly over the long term, although of course this is not guaranteed.
Those structural advantages include the fact that investment trust shares trade on the stock market on the basis of supply and demand, typically at a discount to the total value of the assets in which the trust is invested (net asset value).
If a particular trust gains popularity with investors, that discount will reduce as the share price rises, giving an added kick to the returns from the assets themselves. Of course, the opposite is true if a trust falls out of favour.
Investment trusts can also borrow to invest (‘gearing’), which again can enhance shareholder returns if those investments prosper. However, gearing can increase losses when investments perform poorly.
Additionally, trusts’ closed-ended status means that, unlike open-ended funds, the managers don’t have to worry about dealing with short-term inflows or outflows of investor cash, so they are better placed to invest for the long term.
These attributes do tend to make investment trusts more volatile than their open-ended counterparts over the short term - but for a decades-long investment such as a personal pension, where a modest amount of structurally rooted outperformance can make a huge difference over many years, they can be ideal.
Investing with confidence
J.P. Morgan Asset Management’s broad range of investment trusts is run by highly regarded managers with well-resourced teams, providing access to markets worldwide. The aim is simple but highly effective for pension investment: to provide portfolios of high-quality companies with strong prospects, bought at a sensible price and held for the long term.
Many of the range would work well in a SIPP, as they provide a structured way to invest in a wide variety of regions, countries, sectors and companies from around the globe. And when it comes to longevity, it’s worth noting that at J.P. Morgan Asset Management we’ve been helping our clients build stronger portfolios for more than 150 years.