What is a SIPP?

A self-invested personal pension (SIPP) gives you the flexibility to choose your investments and manage your pension fund according to your preferences. While it offers tax advantages and is a valuable retirement savings vehicle alongside state and workplace pensions, a SIPP may not be suitable for everyone. This type of pension provides the most extensive investment options and control over your investments, but it requires confidence and expertise to make informed decisions and manage your portfolio. Additionally, SIPPs may come with higher fees compared to other pension options.

Essentially, a SIPP serves as an investment wrapper that consolidates your investments under one tax-efficient umbrella, subject to the same tax regulations and withdrawal rules. It enables you to invest in a diverse range of assets, including unconventional options, making it a versatile tool for retirement planning.

Who can invest in a SIPP?

Individuals under 75 years old are eligible to establish a SIPP for the purpose of creating a retirement fund. Residence in the UK is not a requirement, but non-UK taxpayers will not benefit from tax relief on their contributions. It is worth noting that you can initiate a SIPP even if you have existing pension savings, such as a workplace pension or state pension.

Moreover, besides a traditional SIPP, it is feasible to create a Junior SIPP, enabling parents to start contributing to their child or children's pension fund. However, these funds will only be accessible once the child reaches the age of 55, similar to a regular SIPP.

How much can I invest in a SIPP?

Individuals employed can contribute pre-tax annual earnings up to £60,000 for the tax year 2023/24, an increase from £40,000 in previous years.

For earners exceeding £260,000, the contribution limit decreases by £1 for every £2 earned over this threshold, with a maximum reduction of £50,000. Consequently, those with earnings surpassing £360,000 would have an annual allowance of £10,000. On the other hand, non-earners can contribute up to £3,600 per tax year, comprising a £2,880 contribution matched by £720 basic-rate tax relief.

What are the tax benefits of a SIPP?

Similar to other retirement savings options, a SIPP provides a highly tax-efficient method for building a retirement fund. Basic-rate taxpayers receive a 20% government contribution towards their pension, while higher-rate taxpayers benefit from a 40% boost. Essentially, this translates to a £10,000 pension investment costing £8,000 for basic-rate taxpayers and only £6,000 for higher-rate taxpayers. Upon reaching the age of 55, individuals can typically withdraw up to 25% of their pension pot tax-free, with the remaining amount subject to income tax.

How do I access my SIPP?

At the age of 55, you have the option to withdraw all your pension savings, but you can also decide to keep it invested for a longer period and only access it when necessary, such as upon retirement. However, starting from April 6, 2028, this age limit will increase to 57. When you reach the stage of accessing your SIPP, your pension provider will offer guidance on transferring the funds from your SIPP.

There are four main options open to you each with tax implications:

• Take out all of the money - you will get the first 25% tax-free and be taxed on the remainder as income

• Go into income drawdown - take out 25% of the total amount tax-free, leave the remainder of the fund invested and draw an income from it, which will be taxed. For more information on this, read our article

• Take it out in a series of lump sums - you will get 25% of each lump-sum payment tax-free but will be taxed on the other 75% of the withdrawal. If, for example, you took out £10,000 as a lump sum, you would get £2,500 tax-free and then be taxed on the other £7,500 at your normal tax rate (so, 20% for a basic-rate tax payer). These lump sum withdrawals are known as uncrystallised funds pension lump sums (UFPLS).

• Take out 25% and buy an annuity with the rest - an annuity product gives you a guaranteed income for the rest of your life. Also, in theory, you could buy an annuity with your entire SIPP, but it doesn't make much sense from a tax perspective. Read

As there is so much flexibility in how you can access your pension - with different tax considerations for each one - it is important to carefully consider the best option for you. There are risks and rewards for each of the options, but the key is to make sure you maintain a decent income throughout the later years of your life.

Can a SIPP be inherited?

The short answer is, yes, a SIPP can be inherited. If the person dies before the age of 75, the beneficiaries inherit the entire fund, tax-free. If the person dies after the age of 75, the beneficiaries can choose to:

• Take all of the money as a lump sum, paying tax at their normal income tax rate on the whole amount

• If they are dependents, take a regular income, either through an annuity or income drawdown and, again, subject to their income tax rate

• Take the money as lump sums over a period of time, again paying income tax on each amount

Are SIPPs safe?

If a pension is held with an FCA-regulated provider and qualifies as ‘contracts of long-term insurance’ it will be covered by the Financial Services Compensation Scheme (FSCS) with no upper limit. For most SIPPs the level of protection is limited to £85,000 per SIPP you hold with each provider. However, the regulated investments within your SIPP are treated separately and have their own FSCS protection, so if the manager of a fund you hold collapses, you could claim compensation of up to £85,000 because most funds will be regulated. Individual shares won’t be covered, however, and you can’t claim just because your investments haven’t performed well and you’ve lost money.

Advantages and disadvantages of a SIPP

The main pros and cons are as follows:

SIPP pros

• You have control over your own portfolio.

• You can access a wider range of investments than you might get in a workplace or other type of personal pension.

• You get tax relief on your contributions.

• You don’t pay tax on dividend income your investments generate, or capital gains tax on your investment growth.

• You have the flexibility to use a SIPP alone or alongside other pensions to save for your retirement.

• You can start saving small amounts.

• You have various options when it comes to taking money out of your SIPP.

SIPP cons

• You pay income tax on money you withdraw.

• You’ll pay various fees and charges to your SIPP provider and the managers of your underlying funds.

• You can’t access the money in a SIPP until age 55.

• With any investment comes risk, and you could end up with less money than you put in.