This page was last updated on 1 November 2020.
Self-Invested Personal Pension (SIPP)
Self-invested Personal Pensions give you all the freedom and flexibility of a DIY pension. Normally, people’s pension pots are managed by professionals through employer pension funds.
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But when you manage your own pension plan, you choose what your pension pot will be invested in. You must also choose the amount you contribute each year. A SIPP presents an opportunity for the canny investor, as wise pensions investments can pay off. All your investment decisions will be in your hands.
There are lots of reasons why a SIPP might be right for you. Favourable tax treatment is a big upside, as is the range of investment options. You can even open accounts for your dependants. But of course, SIPPs aren’t for everyone, and the performance of your investments is uncertain.
This article details how much you can pay into a personal pension, investment options, tax rules, whether a SIPP is compatible with other pension schemes, and other questions. Treat it as a helpful guide to each stage of the process.
Here is a short video explaining how a SIPP works.
How much money can I contribute to a SIPP each year?
You can pay as much as 100% of your pre-tax earnings into your Self-Invested Personal Pension, up to a £40,000 annual limit. For the highest earners- i.e. those earning more than £150,000 per annum- the tax-free allowance falls by £1 for each additional £2 in earnings.
This stops at a minimum £4,000 a year tax-free contribution allowance. So if you earn £312,000 or more, you can still contribute £4,000 each tax year.
You can contribute lump sums to your SIPP, as long as you remain within the annual limit. If you have a large lump sum that would take a long time to move into a SIPP, purchasing an annuity might be a more straightforward alternative.
Can I get tax relief by paying into a SIPP?
There are indeed significant tax advantages to paying into a SIPP. The government tops up any contributions to your self-invested pension plan by a quarter. So a £2,000 contribution will be matched by an extra £500 of tax relief from the government.
This tax relief can seriously add up, especially if you contribute a large amount to your SIPP over the years.
You don’t have to pay Capital Gains Tax on investments made through your SIPP. Through Capital Gains Tax relief, you could save tens of thousands by making investments through a SIPP.
If you pass away before withdrawing all the money in your personal pension, Inheritance Tax is not applied when it is passed on to your loved ones. If you pass away before reaching the age of 75, your beneficiaries will not have to pay income tax on the money either.
Can I pay into a Self-Invested Personal Pension even if I’m not working?
Yes, you can still pay into your SIPP if you’re not currently working. The bad news is that you can contribute less: your annual allowance is only £2,880. The good news is that tax relief is still applied, bringing your effective contribution to £3,600!
How do I invest through my SIPP?
You can execute your investment decisions through a simple phone call to your SIPP provider. Most providers also allow you to manage your investments online and by post.
Take care to protect against fraud, particularly when managing your investments online and over the phone. Do not give your SIPP information to anyone untrustworthy.
What can I invest in through my SIPP, how risky is it?
You can invest in a wide variety of assets through a SIPP. Different investment options come with different levels of risk attached. Investment choices with more potential for financial return usually come with a greater risk of losing some or all of your money.
It is important to remember that you can get back less than you put in, as the value of assets can go down as well as up.
Can I invest in bonds through my SIPP?
You can invest in bonds for a fairly safe annual return. In buying a bond, you’re effectively lending money to a company. When the company pays interest, that money goes straight to you, the investor.
Bonds are often reliable investments, as you can buy bonds from large companies that tend to pay their debts. Government bonds are also an option.
These are called gilts. The downside of investing in bonds is that your financial returns are limited. But your liability is also limited as if the company fails, its assets are sold to pay back bondholders.
Can I invest in shares through a SIPP?
Those seeking higher returns on their investments can invest in shares, which are also called stocks. By buying a share, you become part-owner of a company. When the company makes a profit, it will usually send you a cut- this is called a dividend.
Stocks and shares can pay off. We’ve all heard stories of those who invested in well-known tech companies early on and made millions. But earning high returns from shares isn’t just for the lucky few. In fact, shares in already well-known companies tend to earn a higher rate of return than bonds.
Aren’t stock markets risky?
Investing in shares can come with serious risks. The value of shares can rise and fall suddenly, and a company can go bust, leaving your shares worthless. So if you expect to start withdrawing from your SIPP soon, it is a good idea to stick to something less volatile. Shares are a long-term investment.
But those in their thirties and forties who don’t expect to retire for decades to come might benefit from investing in shares. By shouldering the short-term risk, they can end up with a larger pension pot when they eventually retire.
Are there any less complicated ways to invest?
If this all sounds a bit confusing, you can invest in a mutual fund or an index fund instead. A mutual fund is like a bundle of stocks, bonds, and other investments. Fund managers seek the right balance between risk and return for their customers, allowing you to avoid the headache of making these decisions for yourself.
An index fund is like a mutual fund but is not as actively managed. For example, an index fund tracking the FTSE 100 (the largest firms in the UK) simply puts together a bundle of shares in these companies.
Funds provide a variety of options for those who seek different levels of risk in their investments.
Can I invest in property through a personal pension?
You can invest in property through a SIPP, but it must be commercial rather than residential. Residential property can only be held through publicly traded investment trusts. Real estate investment trusts are a way of holding residential property in a SIPP without breaking the rules.
If you break the rules by holding residential property in a SIPP, you may be charged a whopping 55% penalty.
When can I start taking funds out of my SIPP?
New legislation introduced changes to pension freedoms in April 2015. If you are aged 55 or older, you can now withdraw from your SIPP account whenever you like. You won’t have to pay any tax on the first 25% of withdrawals.
Further withdrawals are fully taxable, so the amount of tax you pay will naturally depend on what income bracket you’re in.
It is often advisable not to take all your 25% out tax free, unless it is necessary, for example to pay off a mortgage. If you do take out more than 25% then that would be subject to penalties.
If you don’t wish to withdraw from your SIPP any time soon, there’s no rush. Until the age of 75, you can keep making new contributions, managing your investments, and watching your pension pot grow.
Who are the main SIPP providers in the UK?
It is important to know what kind of customer experience you want in order to find the best SIPP provider for you. Depending on your circumstances, you might want a different type of service.
Extra support comes with a higher management charge
Some SIPP providers offer lots of extras to SIPP holders. This can include market data, investment ideas, as well as advice and analysis from experts. The downside is that you’ll be paying for all this through their administration fee. For example, Hargreaves Lansdown provides a number of special features, but they charge a relatively high platform fee.
It’s worth keeping an eye on these management charges, as high fees will effectively cut down the return on your investments. If your pension provider offers a lot of member benefits, make sure they are worth the money.
Providers charge percentage rates on the SIPP holder. Costs may increase if you place more deals.
When you take your money, and assuming you use income drawdown, such as UFPLS, then you may need to pay for additional advice, guidance or suggestions on your investment portfolio.
The DIY investor can control costs by opting for a more trimmed-down option
There is a variety of low-cost investment platforms offering SIPPs. The best-known are Vanguard and AJ Bell You-Invest. An ‘execution-only’ SIPP service does nothing more than carry out investors’ decisions. These services are often very low-cost, but all they will do is place your deals.
Your provider must be authorised and regulated by the Financial Conduct Authority.
What if the company providing my SIPPs pension goes bust?
In the event that your pension company goes bust, you can claim compensation from the Financial Services Compensation Scheme. But your compensation is subject to limitations. You can claim up to £85,000, so if your retirement savings significantly exceed this amount, you are out of luck.
Choose investment companies that are reputable and stable, reducing the likelihood of failure and the need to claim FSCS compensation.
Can I have both a workplace pension and a SIPP?
If you have an existing pension with your workplace, you can still open a SIPP. Self-Invested Personal Pensions exist alongside any other pension arrangements. So you can open a SIPP and top up your pension savings without causing any complications.
You can also transfer an employer scheme into a SIPP so that your pension benefits are all in one place. Such transfers can be complicated in practice, so consult your employer. But moving all your resources from a pension fund into a SIPP can make it easier to manage your retirement benefits.
It is important to note that employers are not obliged to contribute to your personal pension. So if your employer matches pension contributions to a company scheme, it might be worth putting your cash there instead. Remember that the UK taxpayer matches SIPP contributions by twenty per cent though.
If you have a workplace pension and a SIPP, you are still eligible for the state pension on top of that, giving you three sources of retirement income!
Can I set up a SIPP for another person?
If you are a parent or a legal guardian, you can open a Junior SIPP for your child. These are just the same as ordinary SIPP pensions, except the beneficiary will not be accessing the money for a very long time. Note these are separate to a junior ISA.
One of the benefits of setting up a Junior SIPP is the amount of time the investments have to grow. As with normal personal pensions, your child cannot access the money until age 55. So the pension investments you make could have forty or fifty years to appreciate!
There are also tax benefits to opening a Junior SIPP. The money you contribute will not be subject to Inheritance Tax, as it is not legally part of your estate. Plus, each payment into these pensions is matched by the government, just like a normal SIPP. The maximum annual contribution of £2,880 gets you £720 in income tax relief!
Is opening a SIPP a good idea?
With all that in mind, is a personal pension right for you?
Consider whether this type of pension is right for you in the first place. Pensions SIPPs represent a big responsibility, as all the investment choice is down to you. Investing need not be a hassle, but if the words ‘London Stock Exchange’ make your brain turn off, maybe you should seek out a pension scheme elsewhere.
You should consider how much investment risk you can accept in the future. Risk yields higher growth, but if you will need to access your retirement finances soon, you should research some safe investing options. Ownership of equities is risky.
Though there is always some risk when making your own investments, make sure you choose a provider that is regulated by the Financial Conduct Authority. Security against fraud is a crucial part of meeting your retirement goals.
If you’re still not sure, plenty of pensions industry specialists can be consulted for a fee. Consider contacting an independent financial adviser or pension specialist to draw up your pension plans.
The Pensions Advisory Service offers free support, so you can always call or message their expert team for a chat. The Money Advice Service also offers free advice.
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