What is a SIPP?

A couple researching what a SIPP pension is

If you are thinking about starting a personal pension, or transferring existing pensions into an alternative plan, a SIPP is one option you might want to consider. But what is a SIPP?

Here, we explain everything you need to know about what a SIPP is, how it works and what sort of investments you can hold in it, to help you decide whether this type of pension might be right for you to build a good pension pot.

What does SIPP stand for?

SIPP is an acronym for ‘self-invested personal pension’. It’s a type of personal pension that usually allows you access to a much wider range of investments than other schemes.

How does a SIPP work?

A SIPP is essentially a pension wrapper in which you can hold all kinds of different investments, such as shares, unit trusts, investment trusts, gilts and corporate bonds, exchange-traded funds and in some cases, commercial property.

Low-cost SIPPs are usually arranged on what is known as an ‘execution only’ basis, which means you decide exactly where you want your money to be invested, rather than receive advice from the company where your SIPP is held. Some low-cost SIPPs restrict you to a relatively limited range of investments, so you will need to check which options are available to you. Other providers will offer advice on which investments to hold, but their SIPP charges may be higher.

Is a SIPP a good idea?

As you usually choose which investments to hold in your SIPP yourself, this type of pension tends to be best suited to those who have experience of investing, and who have the time to monitor their investments. They generally appeal to people who want access to a greater choice of investments than other personal pensions tend to offer.

They are often used by people who want to consolidate their pensions into one plan, making them easier to manage. If you are selecting a SIPP for this reason, it’s important to make sure you aren’t giving up any valuable benefits or guarantees when transferring your pensions, and you should also check your pension to see whether any exit fee is payable.

Should I transfer my final salary pension to a SIPP?

If you have a defined benefit or final salary pension this will provide you with a valuable guaranteed income when you retire, so transferring it to a SIPP is unlikely to be a good idea.

How much can I invest in a SIPP?

The upper limit on how much you can pay into a SIPP each year is 100% of your earnings, up to a maximum of £40,000. This is known as your annual allowance and if you haven’t used it in  full in any of the past three tax years, you can carry forward any unused allowance, as long as you had a SIPP during this period.

The annual allowance is cut for high earners, so if you have an adjusted annual income of £240,000 or more, it reduces by £1 for every £2 of income above this threshold, down to a minimum of £4,000.

There is also the lifetime allowance to consider. This is the maximum you can pay into your SIPP or other pensions over your lifetime. The lifetime allowance is £1.0731m in the current 2020-21 tax year and if you save more than the allowance you will have to pay tax on any excess.

If you are a non-earner, you can pay in up to £2,880 per tax year into a SIPP pension and benefit from basic-rate tax relief. The taxman will add £720 to this, boosting your overall contribution to £3,600 per tax year. For example, some parents or guardians opt to open a junior SIPP on behalf of their children, to give them a head start on saving for retirement.

How many funds should I have in my SIPP?

There’s no ideal number of funds you should hold in your SIPP. The most important thing is that the funds you do invest in are properly diversified, which means they invest in several different types of asset across a broad range of geographical regions.

The main benefit of having a diversified SIPP portfolio is that if one asset or region underperforms, hopefully some of your other investments will perform better, making up for any losses.

When can I access my SIPP?

Under pension freedom rules introduced in 2015, you can access pension savings held in a SIPP once you reach the age of 55, 10 years below the State Pension age. Because the latter is scheduled to rise to 67 by 2028, the minimum age to utilise this SIPP drawdown facility will rise to 57.  

When you do access your SIPP, the first 25% you take out of your pension will be tax-free, and anything on top of this will be added to your taxable income.

What happens to my SIPP when I die?

If you die before the age of 75 and you have been taking an income from your pension via drawdown and, your pension can be paid to a beneficiary you have nominated free of tax. You don’t have to leave your SIPP to just one person, you can nominate several beneficiaries if you want to.

If you die after the age of 75, the person or people you have left your SIPP savings to will have to pay income tax on any money they take out of your pension. Basic rate taxpayers will pay income tax at 20%, or 40% if they are higher rate taxpayers, rising to 45% if they are additional rate taxpayers. 

Remember….

Choosing a SIPP is a big decision and there are lots of different types of pension scheme available, so it’s a good idea to seek professional pension advice so you can be certain you end up with the best plan for your needs. 

“People who take pension advice on average improve their pension wealth by £30,991” International Longevity Centre, November 2019*

Capital at risk. Past performance is not a guide to future performance. This website does not constitute personal advice. If you are in doubt as to the suitability of an investment, please contact one of Profile Pensions’ advisers. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.

Telegraph Media Group Limited is an Introducer Appointed Representative of Profile Pensions, a trading name of Profile Financial Solutions Limited, which is authorised and regulated by the Financial Conduct Authority. FCA Number 596398. Registered in England & Wales, Company Number 07731925. Registered Office address: Norwest Court, Guildhall Street, Preston PR1 3NU.

*https://ilcuk.org.uk/wp-content/uploads/2019/11/ILC-What-its-worth-Revisiting-the-value-of-financial-advice.pdf 

Information correct at date of publication.