Self-Invested Pension Plans explained
Read more about what a self-invested personal pension is, how they work and whether they might be the right option for you
What is a SIPP?
A self-invested personal pension (SIPP) is a way of saving and investing for your retirement. It’s a tax-efficient investment ‘wrapper’ used to build a pension pot of money for the future. It works in a similar way to a company pension except it is organised by the individual not an employer.
How do SIPPs work?
A SIPP is a long-term investment plan. You’ll pay money in, either regularly or in lump sums, with the aim of growing the overall pot over time.
You can choose and manage the investments yourself or with the help of a financial adviser who provides a ‘discretionary management service’ where, for a fee, they make the day-to-day investment decisions for you, based on your stated aims.
You’ll receive tax relief on your SIPP contributions – either at 20%, 40% or 45%, depending on whether you’re a basic, higher or additional rate taxpayer.
You can access the money in your SIPP from the age of 55 (this is due to rise to 57 from 2028). You can take your cash either as a lump sum, draw it down gradually or use it to buy an annuity – which will provide you with a regular income.
What is the difference between a SIPP and a personal pension?
A SIPP is a type of personal pension. But with a SIPP you, as the investor, will have much more control and choice over the investments in the plan.
In contrast, other personal pensions are often run by a pension fund manager who will make those decisions on your behalf.
What can I invest in with my SIPP?
You have a wide range of investment options with a SIPP.
The type of investments you can choose include bonds, shares and funds, exchange-traded funds, open-ended investment companies (OEICs), unit trusts and even commercial property and land.
The range of investment options for a SIPP can offer higher returns, but also more risk.
Many people turn to an independent financial adviser for guidance on where to invest. If you invest without advice, you’re also less likely to be protected if things go wrong.
SIPP pension rules
There are many rules that govern how SIPPs operate, but these are some of the more important ones.
You have a wide-ranging choice of investments and can change investments as and when you like
When you turn 55 (or 57 from 2028), you can make withdrawals– up to 25% tax-free – even if you’re not retired
You can get tax-relief if you’re under 75 and you’re a UK resident. Basic-rate tax relief from the government is 20% of contributions. If you pay higher-rate tax (40%) you can claim up to a further 20% in tax relief through your tax return. Additional-rate taxpayers (45%) can claim back up to a further 25% - so 45% in total
The maximum amount you can contribute in total from all sources each tax year is usually £60,000. If you haven’t used your full allowance from previous years, you might be able to carry it forward
The lifetime tax-free allowance – the total amount you can have in all your pensions together over your life without incurring a tax charge – is currently uncapped, as long as you haven’t started pension drawdown before 6th April 2023.
What are the pros and cons of self-invested personal pensions?
Here are a few of the pros and cons of SIPPs:
Advantages
You have a wide range of investments to choose from
You have the flexibility to change your investments and how and when you invest
They are a tax-efficient way of saving for retirement – particularly for the self-employed
Disadvantages
Unlike a company pension your employer does not automatically contribute
You’ll have to pay management fees and charges (although this can be true of most types of pension scheme)
Your investment may go down as well as up (this is also true of all pensions and investments)
How do I choose the best SIPP?
There are no restrictions on who can open a SIPP and choosing the best one for you depends on these factors:
Choice. Does the SIPP provide you with the freedom you need when it comes to selecting the investments you want? For the maximum choice you should seek out investors who offer full SIPPs.
Ease of use. Is the platform easy to use? For example, it’s important you’re comfortable logging in and understanding the online dashboards.
Cost. While cost isn’t the only consideration, you should be comfortable with the charges you’ll be paying for your SIPP. There can be a wide range of charges from monthly fees to costs per share trade to exit fees.
If in doubt about what type of SIPP to choose, seek independent financial advice.
What are the tax benefits of SIPPs?
The good news is that you receive tax relief on your SIPP contributions.
For basic rate taxpayers this means that for every 80p you pay into your SIPP, the government adds a further 20p. This basic-rate tax relief is added to your pension automatically. Higher and additional rate taxpayers can claim even more in tax relief through their tax return.
You can contribute 100% of your annual income to your SIPP each tax year, up to the maximum annual allowance of £60,000. Once invested, your money can also grow free from any capital gains or income tax.
When you reach 55 (rising to 57 in 2028), you can take up to 25% of your pension tax-free in one lump sum.
The tax bands are slightly different if you’re a Scottish taxpayer. You can find out more at www.hl.co.uk/scottish-tax
Is a SIPP right for me?
Whether or not a SIPP is the right choice for your retirement savings will depend on a range of factors including for example, whether you’re an employee (and your employer is paying contributions on your behalf into a workplace pension) or in contrast, you’re self-employed.
A SIPP can give you more freedom to invest where and as you like. This can suit those who understand investments and want to make their own investment decisions. But there is added risk and you could stand to lose money if your investments don’t perform well. If you’re not sure how to get started or where to invest it can often be wise to seek independent financial advice.
Other useful guides
Read more about pensions and how they work in our informative guides:
What types of pension plan are available?
How much pension do I need to retire?
Compare pensions with MoneySuperMarket
We’ve teamed up with Profile Pensions to help you choose the right private pension plan for your needs, using funds from the whole of the market.
Open a new pension with Profile Pensions and you can make regular or one-off contributions as you wish.
You can easily transfer old pensions into your new personalised plan if you want to and Profile Pensions can help track down any old pensions if you need them to. You’ll get your own dedicated pension adviser as soon as you sign up to answer any questions you have.
When using the Profile Pensions Find, Check & Transfer service, a one-off arrangement fee of 1% of the pension value is charged when you transfer. All pensions found using this service will be checked for any existing benefits or penalties.
Capital at risk. Past performance is not a guide to future performance. This website does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact your Profile Pensions dedicated adviser. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.
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Should I transfer existing pensions into a SIPP?
Whether you should transfer your existing pension into a SIPP will depend on your personal circumstances and retirement financial goals. You should always carry out thorough research before deciding to do so because you might have to pay exit fees to your current pension provider and face losing valuable benefits once you make the switch.
Can I have a SIPP and a workplace pension?
Yes, you can have a SIPP alongside your workplace pension. You’re also able to contribute to both at the same time.
Can I transfer my work pension to a SIPP?
Yes, you’re able to transfer any old workplace pension to a SIPP. As always, it’s best to seek financial advice before making this decision.
What happens to my SIPP when I die?
If you pass away before taking benefits from your SIPP, it will normally be passed onto your beneficiaries tax-free. However, the options they’ll have will depend on how old you are when you die. If you pass away before you’re 75 the fund will typically be given as a tax-free lump sum. If you die after 75, then your beneficiaries will have to pay tax and be able to choose from drawing a regular income and lump sums.
