About self invested personal pensions (SIPPs)

A self-invested personal pension (SIPP) is a type of defined contribution personal pension that gives you more freedom than standard pensions and allows you to choose which investments are included in your fund.

It is essentially an investment portfolio, and you control where and how your money is invested, it is your decisions that will determine how your fund performs.

Who can open a SIPP

SIPPs are essentially pension ‘wrappers’ that allow you to save, invest, and build up a pot of money for your retirement. You can decide exactly where you invest your funds, you have more flexibility and a much wider choice of investments.

You can manage your funds yourself if you are confident with investing, or you can get expert professional advice from an FCA regulated financial advisor.

To open or contribute to a SIPP, you must be a UK resident and under the age of 75. It is also possible to open a SIPP for a dependent or a Junior SIPP for somebody under the age of 18.

You can also make payments into another individual’s SIPP, i.e. your relatives or spouse, but only if they have set up the SIPP themselves. For those who are not earning, you are allowed to contribute up to £2,880 net each tax year and receive tax relief.

How to open a SIPP

There are many accomplished and well established SIPP providers available that you could approach directly, and they should assist you with the process of opening a SIPP.

However, a financial advisor can help recommend the best provider for your needs and make suggestions to create a suitable investment strategy and portfolio.

When it comes to managing the SIPP, if you have the time and are comfortable and confident with investing, you could attempt to do this yourself.

Alternatively, you could ask your financial advisor to provide a ‘discretionary management service’, where they make the day-to-day investment decisions for you, based on your stated personal goals and aspirations.

Pension rules

In general, the rules for SIPPS are the same as those for other types of pensions. You will still benefit from the same tax relief and tax-free growth, the same lifetime and annual allowances, and you can access your funds in the same way as you can with other personal pensions from the age of 55 (rising to 57 in 2028).

SIPPs have been registered since 2006 and are regulated by the Financial Conduct Authority (FCA) to ensure that consumers are protected and that providers operate within the specified guidelines.

What investments can you put into a SIPP?

With a SIPP, you can explore a much more extensive range of investment options than with standard personal pensions.

It is a tax-protected pension wrapper in which you can keep assets such as government bonds and securities, individual stocks and shares, unit trusts, investment trusts, exchange-traded funds and commodities, deposit accounts with banks and building societies, some NS&I products, insurance company funds, commercial property and land, agricultural land, industrial and retail units, and much more.

It is not possible to directly purchase residential property within your SIPP, but some SIPPs allow you to include residential property through certain collective investments, such as real estate investment trusts (REITs).

Not all SIPP providers allow this type of investment, and there are restrictions on personal use.

Unless you are experienced in investment management, it would be advisable to use an FCA regulated financial advisor who can help you choose and manage your SIPP investments.

Financial advisor fees could prove to be excellent value for money and should limit the chances of you losing money from choosing weak performing and unprofitable investment options.

Different types of SIPP

There are two main types of SIPPs - low-cost SIPPs and full SIPPs.

A low-cost SIPP can usually be started with as little as £5,000, where you are responsible for managing the fund yourself or with the assistance of a financial advisor.

Your provider will not supply much in terms of investment support, but they may offer a range of ready-made portfolios for you to choose from.

A full SIPP generally comes with a certain level of investment support, assisting you with the administration of certain transactions and helping you to make decisions, they also offer access to a wider range of investments.

The charges for a full SIPP vary with providers but are considerably higher, therefore, they are usually more suitable for people with larger pension funds, the typical amount invested in full SIPPs tends to be £150,000 or more.

What charges will I pay with a SIPP?

There will be certain charges you will need to pay to your SIPP provider as well as annual management fees. Additional charges may include things such as an initial set-up fee, platform and administration fees or holding charges, dealing fees for investing, and share dealing fees.

You may also be liable to pay exit fees if you want to transfer your SIPP to another provider.

Before deciding on a SIPP, you or your financial advisor should research and compare all fees, which vary considerably depending on the provider, and any excessive charges can potentially hurt your investment returns.

Tax relief and annual allowances

As with any other type of pension, the contributions you make to a SIPP benefit from government tax relief. The amount of pension tax relief you will receive depends on your usual rate of income tax.

Basic-rate taxpayers receive 20% pension tax relief; higher-rate taxpayers can claim 40%; and additional-rate taxpayers can claim 45% in pension tax relief.

Bear in mind that there are limits to the amount of tax relief you can claim on your pension contributions, the amount you can save into pensions and receive tax relief on is capped each year, this is known as your annual allowance.

You can pay into a SIPP up to a maximum annual allowance of £60,000 each tax year, or up to 100% of your earnings. It is also possible to ‘carry forward’ any unused Annual Allowance from the last three years provided you were enrolled in a pension scheme during that time.

This can be useful if you have a substantial lump sum that you would like to invest for one year, and the tax relief benefits will provide an additional boost to your retirement funds.

When can I access my SIPP funds?

New pension freedom rules were introduced in 2015 and are much more flexible than they used to be, giving most people the option from age 55 (rising to age 57 in 2028) to start taking money from their pension pot and continue to pay into their pension funds.

 You will need to think about the tax implications of taking money out of your pension.

For example, normally, you can take 25% tax-free from your pension, with the remaining 75% subject to your marginal rate of income tax.

Therefore, if you take a large amount from your pension fund, this could result in pushing you into a higher tax bracket, potentially landing you with an unexpected tax bill.

Once you have taken money from your pension, your annual allowance limit is reduced from £60,000 to £10,000 a year, this is called the money purchase annual allowance, and it limits your future tax relief entitlement.

Get expert financial advice

Setting up a SIPP may not be the right choice for everyone, as it requires you to take a more hands-on role, although it does allow you to create an investment portfolio that you choose yourself and take more control of your retirement savings.

Many people will not have the time or be confident and experienced enough to manage their SIPP investments themselves, however, this issue can be resolved by using the services of an FCA regulated financial advisor.

A SIPP will typically be more suitable for those who are confident with managing their finances, are prepared to do the research required to run their pension scheme, and are more experienced investors.

This type of pension may not be suitable for those who are more cautious and inexperienced investors. Should you wish to transfer an existing pension in excess of £30,000. It is bound by law that you use a financial advisor to faciliate this process. 

Let Regulated Advice match you with a financial advisor for expert advice.