What is a SIPP? The Complete Guide

A SIPP (Self-Invested Personal Pension) is a type of personal pension that gives you greater control over how your retirement savings are invested. 

With a SIPP, you can choose from a wide range of investments, including stocks, shares, and funds, as well as other financial products.

How do SIPPs work?

When you open a SIPP, you’ll make regular contributions to your pension pot, and you can choose how much you want to pay in each month. 

You can also make lump sum contributions at any time. Your contributions will be invested in the assets of your choice, and you can change your investments as often as you like.

The money you invest in a SIPP is tax-free, up to a certain amount. This is known as your annual allowance, which is currently £60,000 per tax year. You can also carry forward any unused allowance from the previous three tax years, as long as you were a member of a pension scheme during that time. 

SIPPs can be set up either through a financial advisor or directly with a SIPP provider. It’s important to note that SIPPs sometimes have higher charges than normal pensions, as you’re paying for the additional flexibility and control that comes with a SIPP.

However, to offset this, you can choose to invest in low-cost investments, such as passive funds and ETFs, to reduce your overall cost. 

What’s the difference between a SIPP and a normal pension?

One of the main differences between a SIPP and a normal pension is that a SIPP gives you more control over your investments. 

With a normal pension, your money is usually invested in a default fund chosen by your provider. 

With a SIPP, you can choose from a wider range of investments, including individual shares, funds, and bonds, and even ready-made portfolios.

Another key difference is that SIPPs can sometimes have higher charges than normal pensions. This is because you’re paying for the additional flexibility and control that comes with a SIPP.

With a normal pension, you don’t have to worry about choosing and managing your investments, which can be a big advantage if you’re not confident in your investment knowledge.

Here’s a table providing a simplified comparison between SIPPs and normal pensions.

Feature	SIPP (Self-Invested Personal Pension)	Normal Pension (Traditional Pension)
Investment Control	High: You choose and manage investments.	Low: Investments managed by professionals.
Investment Options	Wide range of options, including stocks, bonds, funds, and more.	Limited options, often focused on funds.
Tax Benefits	Tax relief on contributions, tax-free growth, and tax-free lump sum (up to 25%).	Same tax benefits as SIPPs.
Flexibility	Higher flexibility in investment choices and management.	Lower flexibility, as investments are pre-selected.
Complexity	More complex, requires investment knowledge and time to manage.	Simpler, as investment decisions are made for you.
Fees	Potentially higher fees, depending on chosen investments and platform.	Generally lower fees due to limited options.

Is a SIPP a registered pension scheme?

Yes, a SIPP is a registered pension scheme.

It is registered in the eyes of HMRC, which means you get tax relief on your contributions from the government, and you don’t pay capital gains tax or income tax on your investments held within your SIPP.

You do pay income tax on your SIPP when you actually make withdrawals when you retire, provided that you’re earning enough in the year to be liable for tax.

Is a SIPP a Defined Contribution Pension Scheme?

Yes, a SIPP is a type of Defined Contribution Pension Scheme.

In a Defined Contribution Pension (DC Pension), the amount of money you’ll receive in retirement depends on how much you and/or your employer contribute and how well those contributions grow over time through investments.

A SIPP is a specific kind of pension plan that falls under this category, allowing you more control over where your pension money is invested compared to other pension schemes.

The other type of pension is a Defined Benefit Pension (DB Pension).

Here’s an explanation of the difference between a SIPP and a Defined Benefit Pension Scheme in simple terms:

SIPP (DC Scheme):

• You control your contributions: In a SIPP, you and sometimes your employer contribute money into your pension account. You decide how your contributions are invested, choosing from a range of investment options like stocks, bonds, funds, etc.
• Retirement income not guaranteed: The amount of money you’ll have in retirement depends on how much you and your employer contribute and how well your investments perform. There’s no guaranteed income amount; it’s based on the performance of your investments.

Defined Benefit Pension Scheme:

• Guaranteed income: In a Defined Benefit Pension Scheme, your retirement income is based on a formula that typically considers factors like your salary and how long you’ve been in the scheme. It guarantees a specific amount of income when you retire, often linked to your final salary or an average of your career earnings.
• Employer takes responsibility: Your employer bears the responsibility for funding and managing the pension. They promise to pay you a specific amount upon retirement, regardless of how the investments perform.

With a SIPP, your retirement income depends on how much you contribute and how well your investments perform.
With a Defined Benefit Pension Scheme, your retirement income is predetermined and guaranteed by your employer based on a formula, usually linked to your salary and service years.

The main difference lies in who takes on the risk: with a SIPP, it’s more on you as the individual regarding investment performance, while in a Defined Benefit Pension Scheme, the employer bears more responsibility in ensuring the promised payout.

What’s the difference between a SIPP and an ISA?

Both SIPPs and ISAs (Individual Savings Accounts) allow you to save and invest money tax-free. 

However, there are some key differences between the two:

• With a SIPP, your money is locked away until you reach retirement age (currently 55 but increasing to 57 in 2028). With an ISA, you can access your money at any time.
• The amount you can contribute to a SIPP each year is higher than the amount you can contribute to an ISA. The annual allowance for a SIPP is currently £60,000, while the annual allowance for an ISA is £20,000.
• With a SIPP, you’ll receive tax relief on your contributions, while with an ISA, you don’t receive any tax relief.

One advantage of an ISA is that you can access your money at any time, which can be useful if you need to withdraw funds in an emergency. You can also always take 100% of your ISA tax-free, even if you withdraw it all in one go.

However, if you’re saving for retirement, a SIPP can be a more tax-efficient option, as you’ll receive tax relief on your contributions. However, you will pay tax on withdrawals in line with standard income tax rates aside from your 25% tax-free cash. 

The pros and cons of SIPPs

As with any financial product, SIPPs come with both pros and cons. Here are some of the key advantages and disadvantages of a SIPP:

Pros of SIPPs

• Greater control over your investments: With a SIPP, you can choose from a wide range of investments and have more control over how your money is invested.
• Tax-free contributions and growth: The money you invest in a SIPP is tax-free from income and capital gains tax.
• The potential for higher returns than with a normal pension: Because you have more control over your investments, there is the potential for higher returns than with a normal pension. However, there’s also greater potential for losses depending on what types of investments you choose.

Cons of SIPPs

• Higher charges than normal pensions: SIPPs can have higher charges than normal pensions, as you’re paying for the additional flexibility and control.
• Greater risk, as you’re responsible for choosing and managing your investments.
• Your investments can go down in value as well as up: Investing always comes with the risk that the value of your investments can fall, which could impact the value of your pension pot.

It’s important to weigh up the pros and cons of a SIPP before deciding if it’s right for you.

How much can I put into a SIPP each year?

The amount you can contribute to a SIPP each year is currently £60,000. However, this amount may be reduced if you earn over a certain threshold, or if you’ve already started drawing from your pension. 

You can also carry forward any unused allowance from the previous three tax years, although the previous annual allowance was only £40,000 so you’ll need to factor this in.

It’s worth noting that the lifetime allowance on pension savings, which used to be £1,073,100, has now been scrapped. However, the maximum tax-free cash you’re able to take from a SIPP is still capped at 25% of this value at £268,275, even if your pension is worth more. 

How much can I withdraw from a SIPP?

You can usually start taking money from your SIPP from the age of 55, or 57 in 2028.

You can choose to take a tax-free lump sum of up to 25% of your pension pot, and the rest will be taxed as income. There is no maximum amount you can withdraw, but you should be careful not to deplete your pension savings too quickly.

If you withdraw too much too quickly, you could run out of money too soon.

It’s important to consider your retirement goals and budget carefully before making any significant withdrawals.

How much should I pay into a SIPP?

The amount you should pay into a SIPP depends on your personal circumstances, including your income, expenses, and retirement goals. 

As a general rule, it’s a good idea to save as much as you can afford to, in order to build up a sufficient retirement income.

You should also consider other sources of retirement income, such as the state pension or other pensions you may have. It’s important to have a balanced retirement plan that takes into account all of your sources of income.

Keep in mind that the annual allowance is capped at £60,000 per year and could be lower depending on your income.

What investments can I hold in a SIPP

With a SIPP, you can hold a wide range of investments, including:

• Individual shares: You can choose to invest in individual companies, which can offer the potential for high returns, but also come with higher risks.
• Investment funds: You can choose from a range of funds that invest in stocks, shares, and other assets.
• Exchange-traded funds (ETFs): ETFs are similar to funds, but they are traded on the stock exchange like individual shares.
• Bonds: You can invest in government or corporate bonds, which offer a fixed rate of return.
• Property: It’s less common, but you can invest in commercial property through a SIPP, which can offer the potential for rental income and capital growth.

It’s important to remember that with a SIPP, you’re responsible for choosing and managing your own investments (unless you also have a financial advisor). 

This means that you need to have a good understanding of the risks involved and be willing to do your own research to ensure that you’re making informed investment decisions.

You can also invest in managed or ready-made SIPP portfolios which can be a cheaper compromise to getting bespoke investment advice while still benefiting from expert fund management. 

Do you pay inheritance tax on a SIPP?

Inheritance tax (IHT) is a tax on the value of your estate when you pass away. If the value of your estate exceeds the current threshold of £325,000, your beneficiaries may be subject to IHT.

However, SIPPs can be an effective way to reduce your IHT liability. This is because any money in your SIPP is not considered part of your estate for IHT purposes if you die before the age of 75, and can be passed on to your beneficiaries tax-free.

It’s worth noting that there are some circumstances where your SIPP may be subject to IHT, such as if you die after the age of 75.

Do you need financial advice for a SIPP?

While it’s not a legal requirement to seek financial advice when setting up a SIPP, it’s often recommended. 

This is because SIPPs can be complex products, and it’s important to understand the risks involved and ensure that you’re making informed decisions about your retirement savings. 

A financial advisor can help you to assess your retirement goals and risk appetite, and recommend investments that are suitable for your individual circumstances. 

They can also help you to understand how much money you’ll need in retirement based on your current circumstances, and work out if you need to save more and at what age you could retire.

Who are the best SIPP providers?

There is a wide range of SIPP providers to choose from, each with their own charges and investment options. Some of the most popular SIPP providers in the UK include:

• AJ Bell
• Hargreaves Lansdown
• Interactive Investor
• Nutmeg
• Vanguard

When choosing a SIPP provider, it’s important to consider the charges involved, the range of investment options available, and the level of customer support offered. 

It’s also a good idea to read reviews from other customers to get an idea of their experience with the provider.

The bottom line…

A SIPP can be a valuable addition to your retirement savings plan, giving you more control over your investments and the potential for higher returns than with a normal pension. 

However, it’s important to consider the risks involved and ensure that you’re making informed decisions.

If you’re considering a SIPP, it’s generally recommended that you seek financial advice to ensure that you understand your options and are making the best decisions for your personal circumstances. 

It’s also important to consider other sources of retirement income, such as the state pension, and to have a balanced retirement plan that takes into account all of your sources of income.

When choosing a SIPP provider, it’s important to do your research and consider the charges involved, the range of investment options available, and the level of customer support offered.

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