What is a SIPP pension?

5 minutes

Read our guide to a self-invested personal pension and explore the rules that apply to this type of pension scheme.

A self-invested personal pension can give you more freedom over your investments

  • What a SIPP is
  • How a SIPP works
  • SIPP vs personal pension
  • Tax relief for a SIPP
  • Withdrawing money from a SIPP

What is a SIPP?

A self-invested personal pension (SIPP) can allow you to build a retirement pot largely on your own terms. It's a type of personal pension where your retirement income is influenced by how well your investments perform.

A SIPP gives you plenty of freedom over where your savings are invested. Depending on your SIPP provider, you may get the chance to invest in everything from individual stocks and shares through to investment trusts and even commercial property.

Read on to explore the potential benefits of a self-invested pension, who these products are aimed at, and the tax relief that's on offer.

How does a SIPP work?

SIPPs are a handy way to build on the state pension payments you receive from the Government during your retirement. 

In contrast to a defined benefit workplace pension, where your salary and length of service play a major role, your savings are invested in different assets to help grow your retirement pot . In a SIPP you're given the freedom to personally handpick where your savings are invested, as long as an investment type appears on your SIPP provider's permitted investment list.

SIPPs can allow you to place your money in a diverse selection of assets, including: 

  • Funds, Investment Trusts and ETFs
  • Direct investment in stocks and shares
  • Commercial property (office space, for example)
  • Government and corporate bonds

Some restrictions apply though. For example, a SIPP can’t directly invest in residential or buy-to-let property. The SIPP provider also may not offer all investments types within their product.

You can ask your employer to pay contributions into your SIPP. Just bear in mind that it’s their choice whether they do so.

SIPP vs personal pension

A SIPP account is just one type of personal pension, where you select a provider and arrange to pay contributions yourself. They share many of the same features, with the size of your retirement income ultimately decided by the contributions you make, how well your investments perform and how you choose to withdraw your funds.

A SIPP can offer diverse investments. For example, you're likely to be much more restricted in your investment options in a Stakeholder or Personal pension.

Personally picking and switching investments isn't something to take lightly. After all, investments can go down as well as up, and you may lose more money than you put in. There's also a big onus on you to stay aware of tax restrictions and keep within the SIPP rules set by HMRC.

As a result, SIPPs are generally more suited to investors with previous experience of the financial markets, who are fully aware of the potential risks. Many SIPP holders can use the services of financial advisers to help with financial and investment decisions.

How does tax relief work for a SIPP?

Pensions are a tax-efficient way to save towards your retirement. As with other types of pensions, you will get tax relief on money that you pay in.

If you are a basic rate taxpayer, or a non-taxpayer, you will receive 20% in tax relief on your SIPP contributions. That means the Government tops up any payments you make into your pension by 20%. For example, if you paid in £800, an extra £200 would be added as tax relief, taking the total to £1,000.

If you are a higher or additional rate taxpayer, you can claim additional tax relief through your self-assessment tax return.

Any contributions paid by your employer won't attract tax relief in this way, other than ones they deduct from your pay and pass on to your SIPP provider. Instead, employer contributions can normally be offset against corporation tax as a business expense, which may be of interest to you if you are business owner with your own limited company.

The amount of tax relief you can receive is effectively limited by the annual allowance, currently £60,000, and the amount you earn. The tax authorities may allow you to carry over any unused annual allowance from the previous three financial years, which will help if you exceed the limit.

You can only receive tax relief on contributions you make on amounts up to 100% of your earnings in a tax year. If you earn less than £3,600, you can still pay in up to £2,880 into a SIPP and get tax relief.

Any gains your SIPP investments make will also be free of capital gains tax.

What are the rules for withdrawing from a SIPP?

You'll normally have to wait until the age of 55 (due to increase to 57 in April 2028) before you can start withdrawing money from your SIPP. However you can always leave it longer until the time that suits you best.

From 55 (57 from April 2028), you'll normally have the opportunity to withdraw up to 25% of your pension pot as a tax-free lump sum. The remaining 75% can be withdrawn in a number of ways, including:

  • Through an annuity. These financial products essentially convert your retirement savings into a regular income. They include lifetime annuities, which provide you with an income for the rest of your life, and fixed-term options, where payments are only made for a set period.
  • Using pension drawdown. This option allows you to keep your retirement savings invested, while drawing a regular income. You can also use drawdown to take ad hoc lump sums of income.

You will pay income tax from any money you take out of your SIPP in a similar way as you pay tax on income from your employment.

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What happens to my SIPP when I die?

Your SIPP can be passed on to a loved one if you die. You can nominate who you would like to be the beneficiary of the money in your SIPP and the SIPP provider will take this into account when making the final decision. Whoever receives your SIPP should have the option to either leave the pension pot invested or withdraw the money as a lump sum, or as a regular income.

What is a junior SIPP?

As the name suggests, a junior SIPP is simply a self-invested personal pension that's designed to start children on the road to retirement saving. The rules for each junior SIPP provider are different, but you'll generally manage any contributions and investments on your child's behalf until they turn 18.

What happens to my SIPP if I move abroad?

Depending on the rules of your provider, you may lose the ability to make new contributions to your SIPP if you move abroad permanently. There might be the option to transfer your SIPP to a different country if it's classified as a Qualifying Recognised Overseas Pension Scheme.