What is a SIPP and why would I want one?

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CMC Invest

04 April 2024

Key points

  • A Self-invested Personal Pension – or SIPP – involves selecting your own investments and making your own decisions on how you put your money to work.
  • The UK government offers tax relief on contributions to SIPPs and there are other tax benefits too.
  • Money contributed to SIPPs cannot be accessed until you reach 55-years-old. This is rising to 57 in 2028.

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When you invest, your capital is at risk.

Important: This article is for general guidance purposes only and should not be considered investment advice. If you are unsure about the suitability of an investment, please seek out independent advice. When you invest, your capital is at risk. Tax treatment will depend on your individual circumstances and could potentially change in the future.Pension rules apply.

A Self-invested Personal Pension – or SIPP – is a form of pension that allows you to pick your own investments. There is no manager choosing investments on your behalf – you are in control.

Like other pensions, a SIPP has tax benefits associated with it. If you have a workplace pension, you can use a SIPP in addition to it. SIPPs are also often used by those who are self-employed without access to workplace retirement schemes.

You can have more than one SIPP. You can also consolidate your pensions by transferring old pensions – say from previous employers – into a single SIPP. In some cases, transferring may result in losing benefits or incurring exit fees, so it’s worth checking with your current provider so you know what to expect.

We’ve compiled some additional information below to help you decide if a SIPP is the right investment account for you.

Making your own decisions

As the name implies – a SIPP involves making your own decisions about where your money is invested. Investments in your account won’t be overseen by a manager. Instead, you’ll be selecting where you’re invested.

For some, this may be attractive – you’ve got the flexibility to decide where to put your money. Some investors, however, may feel confident choosing investments in an ISA or a GIA, but don’t want to make investment decisions where their retirement savings are concerned. Others may not want to ever make investment decisions on their own.  

Which of these categories you fall into could determine whether you would want to open a SIPP.

Accessing your money

As with all pensions, you won’t usually be able to access the money in your SIPP until you’re older.

Presently, you can’t withdraw money – unless exceptional circumstances exist – from your SIPP until you’re 55. This will rise to 57 in 2028. Taking money out before this isn’t illegal, but does come with a hefty tax penalty.

You don’t have to start withdrawing money when you hit this age. You also don’t have to have retired to take money from your SIPP – so long as you’re old enough.

When you do start taking money from your personal pension (or pensions), a common way of doing so is using flexi-access drawdown. This allows you to take a 25% lump sum tax free from your pension pot (up to £268,275). Any further withdrawals will be taxed as income.

With some SIPPs, you don’t have to take the 25% lump sum all in one go. There are also additional options for withdrawing money from your SIPP.

The tax benefits  

Like other tax wrappers and workplace pensions, SIPPs come with their own tax benefits.

Tax relief:

When you invest in a SIPP, the government adds to the money you contribute in the form of tax relief. If you’re a basic-rate tax payer, or don’t pay tax, you’ll get 20% tax relief for money added to your SIPP.

In practical terms, this means if you contributed £400 to your pension, you’d receive £100 in relief – £500 has been deposited into your account, 20% of which has come from the government. This is paid straight into your pension account.

If you’re a higher-rate tax payer you can claim up to 40% in tax relief, while additional rate taxpayers can claim up to 45%. You claim this via your self-assessment tax return and have to be paying a sufficient amount of tax at the higher or additional rate in order to realise the full 40% or 45% in tax relief.

The government offers tax relief on contributions made until the age of 75.

Tax-free investing:

Investments within a SIPP are not subject to UK capital gains taxes. If your investments generate dividends or income (like certain bond investments do), these also won’t be taxed.

Tax-free lump sum:

As stated before, when it’s time to withdraw money from your SIPP, you are able to take 25% of your pension pot as a tax-free lump sum.

Inheritance tax:

If you pass away before the age of 75, your SIPP can be inherited by someone nominated by you. So long as certain conditions are met, this can be passed on free of inheritance tax.

Allowances and contributions

Each year, most people can contribute up to either their annual taxable income (which for most of us is our salary) or £60,000 to their pensions – whichever is higher. Higher earners have slightly different rules, which we’ll cover in a subsequent Learn article.

Your annual allowance includes contributions made by your company and any tax relief received. If you go over this amount, it’ll create a tax liability.

You can, however, carry forward unused allowance from previous years when making contributions to your SIPP – so long as you meet certain criteria. For more information, please see our article on pension allowances.

Once you’ve started taking money from your pension, the amount you can contribute each year is reduced to £10,000.

The right choice?

A SIPP offers self-directed investing and tax benefits for those putting money to work for retirement.

Other accounts allow you to build up money and invest in a tax-efficient way but aren’t necessarily just used for retirement. It’s worth therefore, understanding the difference between these accounts. To help, we’ve written a quick comparison of SIPPs and Stocks & Shares ISAs here.