Self-invested personal pensions (SIPPs) explained |
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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.

What is a SIPP?

A SIPP is a type of personal pension that allows you more freedom and control over how your pension pot is invested. As opposed to a standard stakeholder or personal pension, a SIPP offers a greater number of funds, as well as the opportunity to invest directly in a number of different assets, including:

  • UK stocks & shares
  • Foreign stocks & shares – call your SIPP provider to check whether they cover foreign and US markets, as they may offer it as a broker assisted service
  • Unlisted shares
  • Investment trusts
  • Unit trusts
  • Open Ended Investment Companies (OEICs)
  • Exchange Traded Funds (ETFs)
  • Commercial property
  • Gilts and bonds
  • Certain National Savings & Investments products
  • Cash

The types of asset you can hold in your SIPP are determined by what your SIPP provider allows, so you may not be able to invest in all of those named above.

Many providers now offer Low Cost SIPPs that can be managed online with lower fees and charges, increasing their appeal and accessibility to the general public. Low Cost SIPPs generally offer a more limited range of investment options than Full SIPPs, so it's important to check that you can make the investments you would want before proceeding.

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.


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SIPPs operate in the same way as a normal personal pension

As a SIPP is a type of personal pension, the rules on how you can contribute and take your pension are no different.

The tax relief you get on contributions made is the same – up to 100% of your annual salary, up to a maximum of £40,000 per tax year and will benefit from Government tax relief (If you're a non-taxpayer, you can invest up to £2,880 into a SIPP and benefit from tax relief at 20%).So every £100 a basic rate or non-taxpayer invests into a SIPP, as with a normal personal pension, will actually mean £125 in their pension pot!

Although a SIPP gives you more flexibility with regards to investment choice, you can't access your funds any earlier than a normal personal pension, which, under current rules, is on or after your 55th birthday. However, this minimum age will be increasing to 57 by 2028.

When you come to take your pension, the rules for a SIPP are the same as for a standard personal or stakeholder pension: up to 25% can be withdrawn as a tax-free lump sum, with the remainder to be used to provide an income in retirement. However, the new pension freedoms, which came into operation in April 2015, mean pensioners currently have the option to access their entire pension pot in a lump sum at any time after they reach the age of 55, and anything above the tax-free element will be taxed as earned income at the pensioner's marginal rate.

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.


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.

Is a SIPP right for you?

It may be the case that you're disillusioned with your current pension, or that you'd prefer to take the reins and have more control of your pension pot. However, a SIPP is not risk-free and to someone not used to dealing in shares or other investments, it has the potential to prove a costly mistake.

A SIPP is only for you if you are a seasoned investor and you really understand what you're letting yourself in for. You've also got to be comfortable with the risks you are taking.

Having said that, if you are happy to invest for yourself, a SIPP can be a good way to bring different pensions you already have into one place in a way that can allow them to really grow.

The features and investment choice that a SIPP offers should be your primary consideration when deciding which SIPP is best for you. Although a Low Cost SIPP may offer a less expensive way of investing, remember that investment choice may be limited. On the flipside, there's no point paying for a load of features and investment choices that you're not going to use.

Keeping track of your SIPP is vital; therefore a provider with a good online management system is a must so you can regularly monitor the performance of your pension pot.

You should also take into consideration any preferential features of your existing pension, as well as any exit fees if you are considering transferring to a SIPP.

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.


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.

Which SIPPs providers got the highest ratings?

Every year Moneyfacts reviews the products currently available for self-invested pension plans (SIPP) and small self-administered schemes (SSAS). Our product specialists examine each one carefully to determine its best elements and how they compare to others in the marketplace, as well as the level of benefit they bring to customers. Products are then awarded a star rating, with the best receiving the top awards of four and five stars.

Find out which SIPPS got a five star rating.

Beware fees and charges

Until relatively recently, SIPPs have been the preserve of those with larger pension pots. The main reason for this was that the fees and charges involved were not economical unless your pension pot was of a certain size, effectively pricing a lot of people out of the SIPP market.

However, even with a Low Cost SIPP, there are still charges you should be aware of and compare:

  • The set-up fee:

Just setting up a SIPP can incur a cost. Set-up fees vary considerably – there may be no set-up fee (other charges may be higher though) or it could cost several hundred pounds.

  • Annual management charge(s):

You may be charged an annual fee by your broker to administer your SIPP. If you're invested in an open ended investment company (OEIC) or unit trust, there may be an annual fund management fee charged here also.

  • Dealing charges:

If you're buying or selling shares through your SIPP there may be charges for share dealing. Remember that with shares there will also be stamp duty to pay; however, because a SIPP is a tax-efficient wrapper, you don't pay any capital gains tax on anything you make on them.

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This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

Investments are risk-based products. This means that the value of your initial investment and any income generated can fall as well as rise. As previously stated, a SIPP presents its own opportunities and risks so you should weigh this all up carefully, preferably with the assistance of an independent financial adviser. 

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