SIPPs Explained

Most people have established a number of different pensions linked to various jobs over their working lives.

It’s not always easy to see what you have, where this is held or what is happening with your money.

These pensions have the potential to offer limited flexibility and investment choice giving you little control over what can sometimes be the biggest asset after your home. 

What does SIPP stand for?

A self-invested personal pension (SIPP) offers you a far greater selection of investment solutions. It also allows greater flexibility in how you access benefits at retirement and how you can pass on any remaining funds to your loved ones when you die.

They have become especially popular since the introduction of the pensions freedoms in April 2015 as many older pensions have not adopted the new rules. 

Most SIPPs can be accessed online so you can see exactly how much money's in your pension and where it's invested for peace of mind. 

This freedom does, however, come with responsibility as you are in complete control of how and where your money is invested.

These decisions will ultimately determine your retirement pot and therefore we would encourage anyone considering using a SIPP to seek professional regulated financial advice.

Do you pay tax on SIPP withdrawals?

When you reach your 55th birthday (increasing to 57 from April 2028), you’re free to start withdrawing money from your SIPP.

You can usually take up to 25% of the value of your pot tax free - subject to an overall limit of £268,275 in most cases - and the rest of your withdrawals will be taxed as income at your marginal rate of tax. Alternatively, you can use some or all of your pension to provide you with an annuity to provide a guaranteed income for life. 

How does a SIPP work?

SIPPs work much the same way as other personal pensions. You can either add money (contributions) each month or make single payments as and when you like.

The government pays in an extra 20% in pension tax relief - essentially free money - to encourage you to lock capital away and save for your own retirement. Even better, if you are a higher rate taxpayer, you can claim further tax relief through your tax return.

Pension tax relief is not paid by the government on any pension contributions you make once you pass your 75th birthday. 

There are certain limits to how much you can contribute each year which is linked to what you earn each year.

It is still possible to contribute up to £2,880 net each tax year and receive 20% tax relief even if you are not working.

Your employer might also agree to contribute to your SIPP rather than your workplace pension and you can keep paying into a SIPP even if you change jobs or stop working. 

Once it is in your SIPP, your money can grow free from both UK capital gains and UK income tax. 

What can you invest in a SIPP?

A SIPP offers the widest range of investment opportunities that includes (but is not limited to) collective investment funds, investment trusts, exchange traded funds (ETFs), exchange traded commodities (ETCs), bonds, direct shares in individual companies, commercial property and cash deposits. Not all SIPP providers offer all of these investment options.

How your investments perform can have a large impact on the size of your pension pot. Your investment choices can therefore make a significant difference to when and how much income you can retire on.

One of the most interesting features of a SIPP is that it can borrow money to buy certain investments.

For instance, it can take out a mortgage - up to 50% of the net value of the pension - to purchase say a commercial property or land.

Any rent from the tenants is paid directly into the SIPP which can be used towards mortgage repayments or the cost of servicing the property with anything left over simply growing the value of the pension. 

With all these additional options, selecting the most appropriate investment solution for you does, of course, become more complex.

What investments should I avoid? 

There are a limited number of investments that cannot be held in a SIPP without incurring prohibitively high tax charges. Examples include direct investments in: 

  • Residential property. Whilst this cannot be held directly, you could still invest in a residential property fund.
  • Most items you can touch and move (known as tangible moveable property) is also off limits. This tax charge is intended to stop investors holding art, classic cars, wine and other assets that they can be benefit from personally whilst at the same time benefitting from the tax advantages that the SIPP offers.

When can I access my SIPP?

When you reach your 55th birthday (increasing to 57 in April 2028) you’re free to start withdrawing money from your SIPP, without the need to retire from work.

You can usually take up to 25% of the value of your pot tax free - within the previously mentioned limit - and the rest of your withdrawals will be taxed as income. This is known as flexi-access drawdown or UFPLS (uncrystallised funds pension commencement lump sum!!). 

Alternatively, you can use some or all of your pension to purchase an annuity, which will provide you with a guaranteed income for life. 

Who is a SIPP suitable for?

SIPPs are not suitable for everyone. Many of the benefits are achievable through a basic Personal Pension which may come at a lower cost and simplified administration. SIPPs are more suitable for those who want the greatest flexibility in how they access their pension at retirement, people with larger pension savings and/or specific investment objectives.

If you’re not comfortable choosing and managing your investments, you should seek financial advice on the best pension options to suit your needs.

You can’t just choose a number of investments today and forget about them for 20 years. They need to be constantly monitored to make sure you’re on track to meet your retirement goals.

Beyond investments, thought should always be given to what happens to your pension when you are no longer here. The flexibility on death afforded by a SIPP can be very useful in passing on wealth to future generations.

Aren’t SIPPs expensive?

Well yes and no depending on the flexibility you require. 

Providers charge in several different ways and it is often difficult to compare like for like. Moreover, the most cost-effective provider for you will largely depend on the size of your pension fund and how you want to invest it.

Typically, there are four types of SIPP charges when you’re establishing and building up your pot (the accumulation phase). You need to consider the:

  1. set-up charge for the provider to establish the new SIPP
  2. annual provider administration charge; 
  3. dealing fees incurred when you buy and sell various investments
  4. the charges on the underlying funds/investments in your SIPP

It’s also important to take a look at any exit penalties that may apply if you decide to move your pension in the future and the charges you’ll have to pay if you want to draw an income from your SIPP.

Which SIPP is best?

Selecting the best SIPP is not an easy decision. Administration fees vary depending on the investment complexity. It’s not quite as straightforward as choosing the cheapest one. On the other hand there is no point paying high charges for a SIPP that allows you to hold commercial property if you are never going to use that facility.

Full SIPPs tend to have high fees due to the levels of administration required, and so are more suited to those with larger pension funds, who wish to purchase direct commercial property or have more complex investment needs.

However, for the majority of investors the more accessible and affordable platform SIPPs, sometimes known as ‘low cost’ or ‘lite’ SIPPs, are often more than adequate. These tend to impose lower or no setup, administration and dealing charges. 

How to open a SIPP?

Almost everyone under the age of 75 in the UK can open and make tax-relievable contributions into a SIPP. Parents can even open a Junior SIPP for their children. If you’re not comfortable choosing and managing investments, you should seek professional financial advice on the best pension options to suit your needs.

You can transfer and consolidate your existing pension(s) into a SIPP but care must be taken as some pensions offer guaranteed benefits or apply a hefty charge if you transfer and either could outweigh the advantages of moving.

As mentioned a parent can open a SIPP for their children, although the child must still wait until their own retirement age to access the benefits - this could be a positive!

Without the right advice, tackling a SIPP can be complex, time-consuming and potentially costly. 

To speak to one of our expert advisers, please  arrange a free initial consultation consultation here.

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Please note: A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement. The Financial Conduct Authority do not regulate tax planning.