Are you looking for a flexible and controllable way to invest your pension savings? If so, you might want to consider a self-invested personal pension (SIPP). Unlike traditional pension plans, SIPPs give you the freedom to manage your investments in a hands-on manner and invest in a variety of assets, including stocks, bonds, and mutual funds.
In this article, we'll explore how SIPPs work, compare them to personal pension plans, and provide insight into SIPP rules and tax benefits.
A SIPP, or self-invested personal pension, is a private pension that allows savers to have control over where and how their money is invested.
SIPPs allow individuals to invest their money in stocks, bonds, investment trusts, mutual funds, exchange-traded funds (ETFs), and other assets.
SIPPs can be more expensive than personal pensions due to the additional investment options and control they offer.
Any UK resident aged under 75 can open a SIPP.
The annual pension allowance amount changes every tax year, and for 2023/24, it’s £60,000 for most savers.
Savers can access their SIPP funds once they reach the age of 55 (57 after 2028).
How Does a SIPP Work?
A SIPP, or self-invested personal pension, is a type of private pension that allows savers great freedom and control over where and how their money is invested.
Unlike state or workplace pension plans, where financial institutions give savers a limited choice of funds and take care of the investments internally, SIPPs give investors a chance to take a hands-on approach and manage their own investments.
Self-invested personal pensions are best suited for experienced investors who have a certain understanding of the markets. Rather than putting their investments away and waiting for the interest rates to kick in, SIPPs allow individuals to invest their money in stocks, bonds, investment trusts, mutual funds, exchange-traded funds (ETFs), and other assets.
This allows successful investors to generate higher returns than simply saving money in a savings or personal pension account. And because SIPPs are still a type of private pension plan, they provide the same tax benefits as other types of pensions.
The major drawback is that SIPPs are riskier and can be more expensive to maintain and manage than other pensions, albeit they have the potential to be more profitable.
SIPP vs Personal Pension Plans
While they are both very popular private pension plans and have plenty of similarities, there are also some key differences between SIPPs and personal pension plans.
Similarities of SIPPs and PPPs
Both SIPPs and personal pensions are tax-efficient ways to save for retirement,
Both types of pensions offer a range of investment options,
Both types of pensions have restrictions on when you can access your pension savings, usually at the age of 55 or later,
Both types of pensions offer flexibility in how you receive your pension income, such as taking a lump sum, drawdown pensions, or buying an annuity.
Differences Between SIPPs and PPPs
SIPPs offer more investment options and greater control over your pension savings compared to personal pensions,
SIPPs can be more expensive than personal pensions due to the additional investment options and control they offer,
Personal pensions are typically easier to manage and may have lower fees than SIPPs,
Personal pensions may have restrictions on investment choices, such as a limited selection of funds to invest in.
Overall, either option is a great way to secure a comfortable retirement while enjoying tax benefits. Choosing the better option depends entirely on personal preference and how comfortable you are with investing in the markets.
If you are confident in your investing skills, SIPPs can give you the freedom to make the most of your money. If you prefer to have a professional team of investors to manage your funds and provide you with a retirement nest egg, opt for the PPP.
SIPP Rules
If you are thinking about starting a SIPP, you should be aware of the rules and regulations that apply to SIPPs, as well as the eligibility requirements you need to meet.
Who Can Open a SIPP?
The eligibility requirements for starting a SIPP include the following:
Residency: Only UK residents with an address in the UK who pay UK income taxes can open a SIPP.
Age: Anyone who meets the residency criteria and is aged under 75 can open a SIPP. Parents can start a junior SIPP for their underage children.
Employment Status: There are no employment status requirements for opening a SIPP, which means employed, self-employed, freelancers, and unemployed people can start one.
The SIPP eligibility requirements are not demanding, and they give everyone a chance to save for retirement with tax benefits.
Self-Invested Personal Pension and Tax Rules
Before you open a SIPP and start depositing investments, you should be aware of the annual pension allowance rules.
Namely, there is a yearly limit, imposed by the government, that decides how much you can pay into a SIPP, or any other private pension plan, tax-free. That limit is commonly known as the annual pension allowance.
Annual Pension Allowance
The annual pension allowance amount changes every tax year, and for 2023/24, it’s £60,000 for most savers. Making contributions that exceed the annual pension allowance will not get tax relief and will be subject to taxes.
Keep in mind that if you own multiple private pension plans, the annual pension allowance applies toward the total of your savings across all your private pension plans.
In case your annual pension allowance for this year is all used up, you should check if you have an unused allowance from the past three years, as it carries over.
You should be aware that in some cases, the annual personal allowance can be lower than £60,000, including:
Cases when you access your pension pot flexibly, like making cash withdrawals or taking a short term from a flexi-access drawdown fund;
Cases when you withdraw cash from your pension pot through uncrystallised funds pension lump sums;
Cases when you have a high income, or when your threshold income is over £200,000, and your adjusted income is over £260,000.
If you happen to go above your annual pension allowance, your provider should notify you with a statement. When in doubt, use the official calculator to work out if and how much you’ve gone above your allowance.
Lifetime Allowance
In addition to the annual pension allowance, you should be aware of the lifetime allowance, which is currently £1,073,100. Contributions made beyond this amount will not be subject to tax relief and will be taxed at a rate based on how and when you took your pension savings.
If you took your pension before 6 April 2023 and withdrew it as a lump sum, your tax rate will be 55%. If you withdraw it in any other way, like through pension payments or cash withdrawals, the tax rate will be 25%.
On the other hand, if you took your pension on or after 6 April 2023, you will not pay a lifetime allowance charge but be subject to income tax on some or all of the lump sum you withdrew.
Accessing SIPP Funds
Savers can access their SIPP funds once they reach the age of 55. In some extraordinary circumstances, like ill health and terminal medical conditions, savers may be allowed to access their funds earlier without being penalised.
Once the saver is allowed access, they have multiple options regarding withdrawal;
They may opt to take out a tax-free lump sum, up to 25% of the total value of their SIPP, and use the remaining money as regular retirement income.
They may opt for a series of lump sums.
They can keep their SIPP invested and initiate income drawdown according to their needs.
While early withdrawals from SIPPs are permitted, they are certainly not recommended as they can incur very hefty charges. As it stands right now, the penalty for taking money out of a SIPP before meeting the age accessibility requirements is 55%, charged by the HMRC.
SIPP Fees and Charges
Like any other financial or investment product, SIPPs come with a few charges and fees you need to be aware of, including:
Set-up Fees: Not as common as a few years ago, but some providers may charge an initial set-up fee just for creating your SIPP.
Annual Administration Fees: Annual administration fees, also known as platform fees, are charged on a yearly basis by most SIPP providers. The fee is typically a percentage of your pension pot, although some providers may charge a flat fee instead. It covers a range of services, including processing contributions, maintaining the technology infrastructure, providing access to investment products, managing investments, and reporting.
Investment Fees: The costs investors incur for buying and selling shares are usually not included in the platform fee, so you can expect to pay extra charges like trading fees, stamp duty tax, and custody fees, with most providers.
Exit Fees: As previously mentioned, SIPPs allow investors to move their funds from one provider to another, though it usually comes at a cost. Most providers charge an exit fee when you decide to move your funds to a competitor, and this fee can be particularly high if you transfer your pension before a specific period has elapsed since the creation of your SIPP with your current provider.
Other Fees: Some of the additional fees charged by some providers may include financial adviser fees, inactivity fees, currency conversion fees, etc. There are many different providers, each of which charges fees unique to their way of operating.
Since the fees between different providers vary on a case-by-case basis, it’s vital you research as much as you can and find a provider that charges fees you would comfortable paying and is suitable to your circumstances.
Benefits of a SIPP
Though we already touched upon some of them, let’s look at a quick breakdown of all the benefits that make SIPPs an attractive option for individuals looking to save for retirement.
Greater Investment Choice
SIPPs provide the most control over your investments, as well as grant access to a wide range of investment options, including stocks, bonds, funds, and other assets. This gives you the ability to completely tailor your portfolio to your specific goals and risk tolerance preferences.
Tax Efficiency
Even though SIPPs seem more like investment accounts than savings accounts, they still provide all the tax benefits that come with a pension. They allow you to invest in stocks, bonds, mutual funds, and other assets to grow your capital tax-free within a certain limit.
Consolidation of Pensions
You can use a SIPP to consolidate multiple pension plans from different employers or personal pensions into one, making it much more convenient to manage your retirement savings and keep track of your investments.
Flexibility
SIPPs generally offer a higher level of flexibility in terms of making contributions than other private pensions. With SIPPs, choose when and how much to contribute, and also vary your contributions over time. Additionally, SIPPs are usually flexible regarding how you access your pension benefits when you reach retirement age.
Estate Planning
Finally, SIPPs can be passed on to your beneficiaries tax-free in the event of your death before age 75, making them suitable for estate planning.
Although there are many reasons to choose a SIPP as the key component of your retirement savings plan, we still wouldn’t recommend them to everyone, as personal pension plans may be the better option for some savers.
Who Are SIPPs Best For?
The greater control over the investment decisions that SIPPs can only be an advantage in the hands of investors who have the necessary expertise to make the most of their capital.
We believe that SIPPs are best utilised by:
High Earners – people who can afford to take the extra risk and make the most of the pension tax relief on their investments
Experienced Investors – people who have the necessary experience, knowledge, and expertise to properly evaluate the risks and make the right decisions
Business Owners – people who need a SIPP primarily to consolidate their existing pensions and also to manage their retirement funds
For people who never really dabbled in investing, or don’t have the time to micro-manage their funds, opting for a SIPP instead of a PPP would be a risky move that may lead to losses.
FAQ
What are the disadvantages of a SIPP?
Can you withdraw from a SIPP at any time?
What happens to a SIPP after death?
What happens to my SIPP if I move abroad?
Additional Resources
- Regardless of your current financial situation and how young you are, building a substantial pension pot is essential. People work throughout most of their lives, and their retirement is the only time they can kick back, relax, and enjoy the benefits of their hard work.
- Private pensions are retirement savings plans that savers set up, and contribute to, by themselves. They are one of the most popular ways of securing a comfortable life in retirement, and most financial institutions offer some kind of private pension scheme.
- What is (hopefully) one of the cheeriest of occasions, retiring abroad, can and often is soiled by an endless amount of paperwork and one big question: whatever will happen to my pension? It seems daunting, but once you understand the process, you'll see it's not rocket science. Here, we explain how it works.
- Choosing between a Lifetime ISA or pension could be your golden ticket for retiring in style, so let’s learn about the ins and outs of these long-term saving instruments.
- House prices have been on the rise for many years, and it's no wonder why so many people are turning to property as an investment option. However, investing in a pension or increasing pension contributions can also be incredibly beneficial as they are supported by government tax relief. So, which one is the better investment – pension or property? Let's find out!
- The key to successful retirement planning is understanding the options available and finding one that works for you. Whether you're an employee or a self-employed individual, having a pension plan is a secure way to ensure you will have a steady stream of income during your retirement years.
- Saving for your future is essential, but finding the right way to invest your money can be overwhelming. For example, should you pay into an ISA or a pension plan? Let's down the options and find out.
- When you leave an employer, any benefits that have been accrued in your pension will not be lost, as the fund actually belongs to you. This means that even though you are no longer working with that particular company, you will remain a member of their pension scheme and your money will stay invested as it was prior to leaving.
- A limited company pension provides a tax-efficient way for the company to build your pension pot for retirement. According to the latest data, most companies in the FTSE 100 channel between 7.5% and 11.5% of the director’s salary to their pensions.
