Self-invested personal pensions (SIPPs) explained | moneyfacts.co.uk
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SIPPs explained

Michelle Monck

Michelle Monck

Consumer Finance Expert

At a glance

  • SIPP stands for self-invested personal pension.
  • A SIPP is a form of do-it-yourself pension, which allows you to choose how and where you want to invest your pension savings rather than relying on a pension company to do this on your behalf within the fund or funds that you have selected.
  • A SIPP is flexible, allowing you to use lots of different types of investment for your pension pot. However, you need to make sure you check on which types of investment assets will qualify for income tax relief as this has started to change recently.
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How does a SIPP work?

A SIPP is a form of pension wrapper and allows those qualifying investments in the SIPP to benefit from income tax -relief. The SIPP holds these investments and funds in Trust and the SIPP provider acts as the Trustee for the holder of the SIPP. There are broadly two types of SIPPs:, full SIPPs and low-cost SIPPs. Full SIPPs are usually available through a specialist SIPPs firm and offer a wider choice of investments. The SIPPs firm will provide you with information and help you to administrate your investment transactions, but they do not offer you advice and you remain responsible for your investment decisions. They usually charge higher fees than compared to low-cost SIPPs.

A low-cost SIPP can be accessed through an investment platform and they usually come with lower fees than a full SIPP but are more expensive than a standard personal pension. Their range of investments are not as broad as a full SIPP. When you choose a SIPP, you take responsibility for your investment choices – your SIPPs provider or platform will not automatically give you advice. You can choose to have a financial adviser to manage the SIPP and make the investment decisions for you, in line with your risk appetite and aims of the SIPP. You will need to pay your financial adviser for this advice and service. Investing in a SIPP is generally more suitable for experienced investors with larger pension pots. This is because of the larger fees usually charged on SIPPs and the range of investments available. Investors need to understand the investment choices available and have the time to monitor and switch the investments selected. There is always the risk that your investments could lose money as well as grow in value.

How much can I invest into a SIPP?

All pensions, including SIPPs, have maximum limits for for how much you can save into them each tax year and receive tax relief. There is also a cap for the total amount you can hold in your pension pot. During the 2020/21 tax year, you can invest up to £40,000 of your earnings before tax into a pension and not pay tax on this income. If you earn more than £240,000, the amount you can invest in a pension and not pay income tax reduces by £1 for every £2 earned over £240,000. All tax payers receives a minimum allowance of £4,000 for tax-free pension contributions. The maximum that can be held across all your pension funds is £1,073,100 – this is called your lifetime allowance. Funds held in SIPPs are counted towards your lifetime allowance.

What happens to my SIPP when I die?

You can leave the remaining value of your SIPP to the beneficiaries of your will. You will need to let your SIPPs provider know about your wishes. Your beneficiaries are entitled to inherit the funds from your SIPP up to the maximum lifetime value, but what they can access will depend on whether you have taken benefits from the SIPP, the type of payments they want to take from the SIPP or your age at death. In each scenario, your beneficiaries may also find they will need to pay tax on the funds in your SIPP.

Can I have a SIPP and a workplace pension?

Yes, you can have a workplace pension and a SIPP at the same time. You do not need to transfer your workplace pension into the SIPP. Some of the areas you should consider before moving your workplace place pension to SIPP are listed below. Any decision regarding the transfer of a pension is best supported with financial advice from a pensions expert.

• Will your employer be willing to make contributions into your SIPP?

• What are the benefits of your current pension and would you lose these if you transfer it?

• Is your current pension going to be flexible when you want to access your benefits?

• What options will your beneficiaries have to inherit your pension when you die?

• What types of investments do you want to access?

In nearly all cases, if you have a final salary pension (defined benefit), then transferring this is often not a good choice and speaking to a financial adviser is highly recommended. Even if you are not on a final salary scheme. Similarly, if your workplace pension is a defined contribution scheme, often referred to as money purchase, you should review your answers carefully and consider speaking with a financial adviser before making any transfer.

 

Should I transfer my pension?

Deciding if you should transfer your pension is a big decision and in some cases, for example, if you hold a defined benefit pension of more than £30,000, you will be required to get financial advice before being allowed to make any decision. Find out more in our guide about how to transfer your pension.

SIPP FAQs

Do I get tax relief on a SIPP?

The advantage of saving into a pension compared to other forms of investment is the tax relief available. This means you can contribute into your pension from your gross pay (i.e. before it is taxed) or if you add to this after you have paid tax, then the pension provider can claim this on your behalf and add it to your pension pot. As a type of pension, SIPPs do include tax relief, however there are some types of investment that HMRC will not include for tax relief. You should discuss this with a financial or tax adviser.

Can I add a holiday let to a SIPP?

SIPPs allow you to invest in a range of commercial property, either through an investment fund or to hold this directly in your SIPP. The latter is more specialist and more likely to require you to have a full SIPP. You may also incur stamp duty and capital gains tax as a result of moving the asset into your SIPP and these types of transfers (called in-specie) may not qualify for income tax relief.

Can I transfer shares into a SIPP?

Yes, this is known as an in-specie contribution, where property or shares are moved into your SIPP. These types of transfers may not qualify for income tax relief following a recent appeal won by HMRC, where the Upper Tax Tribunal held that non-cash assets do not qualify for income tax relief.

What investments can be put into a SIPP?

There is lots of choice when investing into a SIPP – some of the investments accepted by SIPPS include bank and building society accounts, investment trusts, stocks and shares, unit trusts, tradeable gold, unquoted equities and intangible property such as copyright, royalties and patents. Residential property is excluded from SIPPs as an investment.

How to choose a SIPPs provider

Choosing a provider for your SIPPs will greatly depend on the range of investments they have available. Some offer only unit trusts or pooled investments, while others will include commercial property with or without a mortgage, but it can be harder to find those accepting property abroad.

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