Start a SIPP now if retiring in 10 years?

[Tayegete]

I have a defined benefit pension some of which will kick in at 60 and the rest at SPA. I won’t get enough at 60 to retire so I’m keen to start a top up fund, however I’m super risk adverse and current global volatility is making me nervous. Is it safer to save up in an ISA? I know I won’t get tax relief but I’m terrified of losing money.

Is the DB pension current, in that you are paying into it now? If so then you need to be aware of Pension Input Amount (PIA) if also paying into another pension. What you pay into the DB scheme is not the amount of pension annual allowance being used, the figure is higher.

DB schemes also often have AVC - Additional Voluntary Contributions - which builds up a pot of money linked to the DB pension. Ask your DB scheme about options for that as then payroll takes care of not putting too much in.

Pension vs ISA - you should have both. I am 50, not old enough to access pension, so if I did not have ISA i would have to be working a lot more than I do. I can use ISA to supplement income if need be, where as I cannot take from pension.

Pension and ISA are both invested. So volatility of markets affects both. A Cash ISA is a short term store of money, useful as a buffer. I would not have that for 10 years, I would be using a Stocks & Shares ISA.

Pension beats ISA, but ISA is more accessible, so have a combination of both.

Video: Pension vs ISA retirement income

Now is the time you want to be investing in S&S while the markets are low.

Thanks both. The DB is two different schemes (public sector) and is current. I will be doing fine at SPA it’s just the bit after 60 I’m concerned with so would potentially build up a small pot and then take it all in those years alongside the smaller DB pension that I get at 60. I was debating SIPP vs workplace AVCS so that info is really helpful. I was thinking cash ISA rather than S&S but I guess 10 years is long enough to manage the risk. Thanks for the video link.
In terms of buying now I’ve heard people say the market is due a longer term correction which made the cash ISA feel like a safer bet.

10 years is a reasonable time horizon, however, being too risk averse exposes you to the risk of inflation (if you just use savings type products where your capital is not at real risk).

A good place to start is the Vanguard SIPP, which has a managed and a DIY service. You can also check, at a high level, your real appetite for risk using online tools such as this one.

https://www.ii.co.uk/analysis-commentary/quiz-find-out-what-your-attitude-risk-ii515465

Ultimately taking a moderate amount of risk is right for most people, and with 10 years you shouldn’t worry too much about current market volatility.

When you get your 2024/25 statement from the DB schemes, look for the PIA (Pension Input Amount). Total those and compare to your gross income. If PIA=£24k and your gross income is £52k then you have plenty of unused pension annual allowance to use via a SIPP. If the gap between the PIA and your income is small then I would not do a SIPP as in 2025/26 tax year your PIA will likely be higher and you could exceed pension annual allowance.

Using ISA as a bridge between when you reduce work to when you claim pension is fine. Stocks & Shares ISA for a 7+ year time horizon. Cash ISA for medium term emergency fund. When near retirement you can move investments within ISA to cash like investments if desired. However having around a 3 year cash buffer and rest invested can give more opportunity for growth. See image: Cashflow ladder

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Thank you.

How much will you have available to save over the 10 years? Are you a basic rate tax payer?

If the DB pension income will take you over the personal tax allowance, there are three main advantages to also saving into a personal pension, but I'm not sure if a 10 year time frame would be sufficient to make it worthwhile compared to the accessibility of an ISA.

1.Access to the personal pension tax free within your personal allowance, if you plan to retire before the DB pension is due.

2.Benefits claimed due to ill health or redundancy would not count pension as savings, unlike an ISA.

3.The tax advantages.
The tax free lump sum from the personal pension. On a £20K pension you'd save about £1000 in tax in total from the lump sum if you are a basic rate tax payer.
If your DB pension was over the personal allowance, all other income from the pension would be taxed.
If you're a higher rate tax payer now you'd receive a greater uplift in the pension, and perhaps be taxed at a lower rate on retirement on the income.

A basic rate tax payer looking to save less than £20K overall, and planning to work until the DB pension kicked in, an extra £1K (or less) from the tax lump sum might not be sufficient entice you to choose the restrictions of a pension over a mixture of cash ISA and S&S ISA.

(I'm not an IFA or tax expert).

I’m a higher rate tax payer. I’m currently planning to save around £500 a month. We are hammering the mortgage at the moment but should be able to pay that off in a couple of years and then will be able to pay £2k a month.

I’m in a similar situation as you. I have 2 x DB pensions, one which i intend to take at 55 and one at SRA. For the gap between 55 and SRA, I have savings both outside SIPP and ISA so I’m dripping £20k into S&S ISA and just enough into my SIPP to bring me down to 20 percent tax.

however, do remember that you will have to pay income tax on at least 75 percent of your SIPP when you drawdown so plan carefully. And the goal posts will change. Ime a SIPP is only worth it if you are a higher or additional rate taxpayer.

It doesn’t matter whether you invest in a SIPP or an ISA, it’s the investments which are risky (or less risky). The SIPP / ISA is just a tax wrapper.