Self-Invested Personal Pensions Explained
A self-invested personal pension (SIPP) gives you complete control over your retirement savings. But it means you have to make all your own investment decisions.
What is a SIPP?
A self-invested personal pension, or SIPP for short, is a do-it-yourself personal pension. You make contributions in the same way as you would with a more traditional personal pension and enjoy tax relief on what you put in. The difference with a SIPP is that you have more flexibility to choose your investments.
Although a personal pension will let you choose from a range of investment funds, a SIPP usually offers a far greater range of investments, and there is no default option if you don’t want to choose investments yourself. You usually have online access to your SIPP, so you can check on your portfolio and buy and sell investments whenever you like.
» MORE: Complete guide to pensions
What can SIPPs invest in?
You can invest in a wide range of assets with a SIPP, including:
- Stocks and shares
- Investment trusts
- Unit trusts
- Open-ended investment companies (Oeics)
- Gilts and bonds
- Commercial property
- Exchange traded funds (ETFs)
- Real estate investment trusts (REITs)
- Offshore funds
Not all SIPPs will have access to all these options, however.
Pros and cons of a SIPP
- Choice. A SIPP gives you access to a huge range of investments to build a portfolio that suits your retirement needs.
- Control. You can manage your investments within your SIPP and trade as you wish.
- Consolidate. You can bring several pensions together into one SIPP.
- Tax relief. As with all pensions, any contributions you make to a SIPP are subject to tax relief.
- Longevity. You can carry on making contributions to a SIPP until you are 75.
- Costs. SIPPs can have higher charges than other personal pensions.
- Risk of making a mistake. Having complete control over the investments in your pension leaves open the possibility you will make trading mistakes that affect the eventual value of your pension.
- Access. You cannot access your SIPP until you are 55 (or age 57 from 2028).
- No employer contributions. As a SIPP is a form of personal pension you won’t get any employer contributions as you would with a workplace pension.
What are the tax benefits of a SIPP?
The tax benefits of a SIPP are the same as for any pension: any money you pay in is subject to tax relief. That means the government will refund the income tax you have paid on that money. This happens in two ways.
First, your pension provider will automatically apply to the government for basic-rate tax relief on your contributions and add it to your pot. That means for everything you pay in, another 20% will be added. So, if you pay in £80, the government will add £20.
Second, if you are a higher- or additional-rate taxpayer you can reclaim the rest of your income tax on pension contributions via your tax return.
On top of that you can withdraw up to 25% of your pension tax-free after you turn 55 (this becomes age 57 from 2028).
How much money can I put into a SIPP?
You can pay up to 100% of your earnings into your pensions each year, up to an annual allowance of £40,000. If you only have a SIPP, you can put it all into there, but if you have more than one pension that annual allowance covers contributions into all your pensions.
There are some exceptions to the annual allowance if you are a very high earner, don’t have an income or have already accessed your pension.
There is also a lifetime allowance that limits the maximum size your pension can grow to. In the 2020/21 tax year it stands at £1,0703,100. If your pensions exceed this a tax charge will be applied.
What happens when I retire?
You can access your SIPP at any time from the age of 55 (57 from 2028), whether you have retired or not. You can take the cash out to use as you wish, or you can set up an income drawdown plan. This is where you leave your money invested and draw a regular income from it.
Your SIPP provider can do this, but you may decide to shop around again at this stage if a rival provider is offering a better deal.
Should I open a SIPP?
You should take advantage of your workplace scheme, if possible, because you will get employer contributions.
But a SIPP can be a good option if you don’t have access to a workplace scheme and are confident making your own investment decisions. Keen investors may also use one to run alongside a workplace pension or to consolidate schemes from previous jobs.
Always seek professional financial advice if you plan to consolidate your pension pots, as depending on the type of pension you have, this may not always make financial sense and you could lose significant funds.
How to open a SIPP
- Choose a provider. You need to weigh up the fees and charges of different providers and how that will affect your pot. You will typically be charged either an annual percentage fee or a fixed administration fee. (As a rule of thumb, fixed fees may prove cost-effective for people with a large pot. If you are just starting out, look for a low percentage fee.) There will also be trading fees, plus fees levied by individual funds that you choose to invest in.
- Check whether the SIPP offers access to the investments you want. If you are apprehensive about making the right choice, explore options with ready-made portfolios or research tools that will help you make your selection.
- Give your details and fund the account. You’ll need your bank information and your National Insurance number in order to open your account. Once you’ve transferred money in, you can start choosing your investments.
Should I transfer other pensions into a SIPP?
The investment choices offered by a SIPP can be attractive, and you may be considering moving other pensions there. You can do this — but do your research first. Check whether you will pay any exit penalties to your existing pension provider, and look at whether you will lose any valuable benefits such as guaranteed annuity rates if you move.
If you have a defined benefit pension, transferring to a SIPP is almost certainly a bad idea. You will lose out on your guaranteed income as well as other potential benefits such as income for your spouse if you die. Seek expert financial advice to help you decide if transferring pensions is the right strategy for you.
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Ruth is a freelance journalist with 15 years of experience writing for national newspapers, magazines and websites. Specialising in savings, investments, pensions and property. Read more