What is a SIPP, and how does a self-invested personal pension work?

A self-invested personal pension (SIPP) gives you more control over your retirement savings, enabling you to make your own investment decisions. Contributions into a SIPP are eligible for tax relief and existing pensions can be transferred into a SIPP too.

Ruth Jackson-Kirby, Tim Leonard Published on 25 January 2021. Last updated on 10 August 2021.
What is a SIPP, and how does a self-invested personal pension work?

Taking control of your retirement planning has never been more important, and with a SIPP, the decision over where your pension savings are invested is firmly in your hands. A SIPP can be a particularly flexible way to be better prepared financially for your retirement.

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: All you need to know about 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

However, it’s always best to check which investments a particular SIPP offers, as not all will have access to every option.

» MORE: Investment funds explained

Pros and cons of a SIPP

Advantages

  • 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, the contributions you make to a SIPP can be eligible for tax relief.
  • Longevity. You can carry on making contributions to a SIPP until you are 75.

Disadvantages

  • 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).

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 £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).

» MORE: Learn more about pension tax relief

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, before you need to pay tax. 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 2021/22 tax year it stands at £1,0703,100. If your pensions exceed this a tax charge will be applied.

» MORE: Pension contribution limits in depth

When can I access my SIPP?

You can access your SIPP at any time from the age of 55 (57 from 2028), whether you have retired or not. Up to 25% of your fund can be taken tax-free, and you can take the rest as cash if you’re willing to pay what is likely to be a big tax bill. However, most people will use their remaining fund to either buy an annuity, or to set up an income drawdown plan, where you leave your money invested and draw a regular income, or both.

Your SIPP provider can do this, but you may decide to shop around again at this stage if another provider is offering a better deal.

» MORE: Taking your pension benefits

Should I open a SIPP?

It can be a good idea to take advantage of a workplace scheme if one is available because of the boost employer contributions can provide.

But a SIPP can be a good option if you don’t have access to a workplace scheme and are confident in making your own investment decisions. Some may also use a SIPP to run alongside a workplace pension or to consolidate schemes from previous jobs. Some employers offer workplace SIPPs in which they will make contributions as well.

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 pension benefits.

» MORE: The benefits of pension advice

How do you set up a SIPP?

  1. 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. Fixed fees may prove cost-effective if you have a large pot, but if you are just starting out, a low percentage fee may be preferable. There will also be trading fees, plus fees levied by individual funds that you choose to invest in.
  2. 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.
  3. 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.

Who offers SIPPs?

There are a significant number of pension providers, insurance companies and brokers that offer SIPPs. You should always shop around for a SIPP that offers the investment options you want and has competitive charges.

» COMPARE: SIPP providers

Can I transfer other pensions into a SIPP?

Yes, you can transfer existing pensions into a SIPP, but you must always 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 are looking to transfer a defined benefit pension (DB), then the need for research and possibly advice is even more important. It is possible to transfer your DB pension into a SIPP. You will essentially forgo guaranteed income and this will be swapped for a cash value into your SIPP which will need to be managed leading up to and into retirement. As well as this, transferring could mean that the death benefits you would receive could change dramatically.

Whether the transfer of a DB pension is right for you is a highly complex decision that depends on a wide range of factors that will be different from person-to-person.

Always seek expert financial advice to help you decide if transferring pensions is the right strategy for you. It is a legal requirement to take advice when transferring defined benefit pensions with a value in excess of £30,000.

» MORE: Learn about pension transfers

What happens to my SIPP when I die?

If you die ahead of taking benefits from your SIPP, it can usually be passed onto your beneficiaries tax-free. However, exactly which options they have will be determined by how old you are at death. Passing before age 75 means the fund can usually be taken as a tax-free lump sum. However, after 75 your beneficiaries will have the choice of either a lump sum, drawing a regular income, or taking lump sums, but will need to pay marginal rate income tax for all.

» MORE: What happens to pensions after you die

WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in.

Image source: Getty Images

About the authors:

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

Tim draws on 20 years’ experience at Virgin Money, Moneyfacts and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more

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