How To Invest In A SIPP (Self-Invested Personal Pensions)

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SIPP providers offer government-approved tax-efficient self-invested personal pensions where you choose exactly what shares, funds, ETFs, and bonds you invest in for your retirement and give you complete control over your pension savings. In this guide, we explain what SIPPs are, how they can be used to boost your retirement income and the pros and cons of investing in a self-invested personal pension,

What is a SIPP pension?

A SIPP is a pension that you manage yourself. A SIPP gives you far greater control over what you invest in for your retirement income, as you can pick individual shares, bonds, funds and ETFs. this is compared to a traditional private pension, where the investment decisions are made by professional investment managers.

SIPP accounts are suitable for those confident in managing and investing their pension savings as a self-invested personal pension (SIPP) can save money over a managed pension and can let you increase the value of your retirement savings faster if you invest well.

SIPPs are quite similar to personal pensions, which are pensions that you arrange yourself. However, SIPPs generally offer more investment options than personal pensions. Most SIPPs enable you to invest in UK and international shares, funds, investment trusts, exchange-traded funds (ETFs), bonds, and more. Where are personal pensions limit your investment options to managed funds and pre-made portfolios.

How does a SIPP work?

SIPPs work by shielding up to £60,000 a year (up to £1,073,100 in total) in contributions in a tax-free wrapper, where you don’t have to pay capital gains tax on the profits when you retire.

Contributing to a SIPP can be a very effective way of saving for retirement. When you save into a SIPP, you receive tax relief.

This is essentially a reward from the government for putting money away for retirement. Additionally, all investment gains and income within a SIPP are tax-free.

SIPPs are an investment type suited to a range of people including business owners, those who don’t have workplace pensions, those who wish to consolidate past pensions, and those looking for more control over their pension savings. They can be particularly effective for those on higher incomes, who may wish to make extra pension contributions and those who are self-employed, who may be able to offset SIPP contributions against their tax bill.

SIPPs Explained (video discussion)

In this episode of Good Money Guide TV we talk to Rebecca O’Keeffe from Interactive Investor and discuss the Pros and Cons of investing in SIPPs. We cover, who they are good for, what Interactive Investors offers through their SIPP account and look at the risks and rewards of investing in SIPPs.

YouTube video

How to choose a SIPP provider

These are the main things to consider when deciding which SIPP provider to use:

  • Account fee – the annual charges of having a SIPP account
  • Minimum deposit – the smallest amount of money you can deposit initially to open a SIPP account
  • Share dealing fee – the standard fee for buying and selling UK shares (this may reduce for frequent traders)
  • Fund dealing fee – the cost for buying and selling funds (this may reduce for multiple monthly deals)
  • International shares – does the SIPP account give you access to US and other international stock markets?
  • Junior SIPPs – can you also open an account for your children to help them invest for their retirement?

Related guide: Our rankings of the best SIPP accounts in the UK.

Different types of SIPP

There are two different type os SIPP and which one you choose depends on how you want to invest for your retirement

Low-cost SIPPs

The low-cost SIPP (also known as SIPP lite or DIY SIPP) typically charges lower fees than a full SIPP. This is because it is ‘execution-only’, which means that the provider offers a platform for you to choose and manage your investments, with generally fewer investment choices and often no investment advice. Low-cost SIPPs offer fewer asset classes than their full cost counterpart and typically include listed equities, Exchange Traded Funds (ETFs) and bonds, but not unlisted equity or commercial property. Some may just offer a limited number of readymade funds. Providers do not offer advice, leaving the investor to make their choices on their own.

Full-SIPPs

Full SIPPs offer the widest range of investment choices, including unlisted stocks and commercial property. Depending on the provider, you may also have access to an investment adviser with a full SIPP. The advice – and the broader investment options – mean that full SIPP fees are generally higher than lite SIPPs. When thinking about what to include in your SIPP, remember that you will need to maintain and manage your portfolio, so your financial circumstances and expectations are important. Think about your level of investment experience, financial knowledge and confidence. Consider whether the provider offers a smaller fixed range of investments or a wider, more flexible portfolio.

Investments that can be held in a SIPP

The range of investment options will vary across providers, but typically investors can choose from:

  • Individual stocks – company shares registered on a stock exchange
  • Bonds – loans made to companies or government
  • Unit trusts – open-ended fund which pools investment with others
  • Investment trusts – a closed ended investment vehicle where your money is pooled with other investors
  • Exchange traded funds – These are basket of stocks that trade on an exchange.
  • Deposit accounts with banks and building societies – these provide fixed returns on savings accounts
  • Commercial property – investment in office buildings, shops and factories

SIPP charges & fees to look out for

Value for money is more important than cost, but clearly excessive charges are a danger to savings. SIPP costs to look out for include:

  • A set up charge. Not all providers impose this fee and the amount varies across the market.
  • An admin fee is the annual charge to cover running the SIPP. Again this varies and investors should compare the market before investing.
  • Dealing charges apply to the buying and selling of assets. The more active an investor you are, the higher these will be.
  • Transfer charges may be applied if you want to bring in additional pension plans.

Tips to reduce your SIPP charges

You can reduce your SIPP charges by following these tips.

  1. Invest in investments that have low fees. ETFs, for example, generally have much lower fees than actively managed funds. It is much cheaper to buy an ETF that follows gold, that to invest in a selection of gold stocks that perform relative to the gold price.
  2. Check custody fees. It’s worth noting that on some platforms, some investments attract lower custody fees than others. For example, Hargreaves Lansdown SIPP fees start at 0.45% whereas AJ Bell only charges 0.25%.
  3. Set up regular investing. If you set your SIPP account to automatically invest in funds and shares for you each month it is cheaper than doing it manually as commission is reduced. You can also save money by dealing once a month, rather than by doing lots of small deals.

SIPP contribution limits & allowances

You can pay 100% of your earnings into a pension in a year and – under current legislation – receive tax relief of up to 40% on the first £40,000 paid in (the annual allowance). For those earning more than £150,000, the annual allowance is reduced by £1 for every £2 earnt over the £150k threshold until the £10,000 limit is met.

There is also a lifetime allowance for total pension savings above £1,073,100, after which contributions will be taxed at 25% (55% for lump sums). The Lifetime Allowance (LTA) is the total amount of money you can build up in your pension accounts while still enjoying full tax benefits. If you go over the Lifetime Allowance, you will pay a tax charge on the excess whenever you take income or withdraw a lump sum from your pension, or reach the age of 75 without having taken any benefits. The Lifetime Allowance is adjusted each year in line with inflation. For the 2021/22 tax year, it is £1,073,100.

SIPP tax relief (how to claim and the benefits)

SIPPs are free from capital gains tax and income tax, but investors pay stamp duty when they sell shares. Your SIPP provider will claim and apply basic tax relief on your behalf when you make contributions

You also benefit from tax relief is paid on your pension contributions at the highest rate of income tax you pay. Basic-rate taxpayers receive 20% tax relief, meaning that an £800 contribution is topped up to £1,000 by the government, while higher-rate taxpayers and additional-rate taxpayers can claim 40% and 45% tax relief respectively through their tax returns. In Scotland, income tax rates are different, so tax relief is applied differently.

If you do not have any taxable earnings, you can still pay up to £2,880 into your SIPP each tax year. This will be topped up to £3,600 after tax relief. With a Junior SIPP, contributions are subject to 20% tax relief.

SIPP drawdowns

When you put your SIPP into drawdown, you keep the majority of your pension invested, while making flexible withdrawals for income.

You can move your SIPP into drawdown when you turn 55. Once in drawdown, you can take up to 25% of your SIPP as a tax-free lump sum. You can then make withdrawals from the remainder of your pension balance that can be used for retirement income. These will be taxed at your normal rate.

With pension drawdown, you generally have a lot of flexibility. You have flexibility over the amounts you withdraw and the timing of the withdrawals. Additionally, you are not locked into a drawdown for life. At any time, you can use your pension savings to buy an alternative retirement income product such as an annuity.

To set up a SIPP drawdown, you need to ask your SIPP provider to move your pension into drawdown mode. Normally, you have to complete a pension drawdown application form.

Some SIPP providers charge annual drawdown fees. Providers that currently charge for drawdowns include Aegon, AJ Bell, Halifax Share Dealing, Interactive Investor, and the Share Centre. SIPP providers that do not currently charge annual fees for drawdown include Hargreaves Lansdown, Vanguard, and Fidelity.

SIPP access

Because a SIPP is a retirement account, you cannot access money in a SIPP until the age of 55. In 2028, this will rise to 57. Once you turn 55, you can make withdrawals from your SIPP, however, you can only withdraw 25% of your SIPP savings tax-free. Anything above this will be added to your income and taxed at your normal rate.

Most SIPP providers do not allow you to withdraw money before the age of 55. If they do, they will likely charge you a large fee for doing so. Additionally, HMRC will tax the funds withdrawn at 55%.

SIPP advantages:

  • Contributions come with tax relief.
  • Investment gains and income are tax-free.
  • There is a generous annual allowance.
  • You have control over your retirement savings.
  • You generally have a wide range of investment options to choose from.
  • You can transfer old pensions into your account.

SIPP disadvantages:

  • You cannot access your money before the age of 55.
  • When you turn 55, you can only withdraw 25% of your SIPP tax-free.
  • There is a limit to the amount of tax relief you can receive.
  • You are responsible for managing your retirement savings.

SIPPs versus cash ISAs

Compared to a Cash ISA, the main advantages of a SIPP are that contributions come with tax relief, you can invest your money in growth assets, and you can potentially contribute more than the annual ISA allowance of £20,000. The main disadvantages of a SIPP versus a Cash ISA are that you cannot access your money until you turn 55 and at age 55, you can only withdraw 25% tax-free. With a Cash ISA, you can withdraw your money at any time tax-free.

SIPPs versus stocks & shares ISAs

Compared to a Stocks & Shares ISA, the main advantages of a SIPP are that contributions come with tax relief and you can potentially contribute more than the annual ISA allowance of £20,000. The main disadvantages of a SIPP versus a Stocks & Shares ISA are that you cannot access your money until you turn 55 and at age 55, you can only withdraw 25% tax-free. With a Stocks & Shares ISA, you can withdraw your money at any time tax-free.

SIPPs versus Lifetime ISAs

Compared to a Lifetime ISA, the main advantages of a SIPP are that contributions come with tax relief, you can potentially contribute more than the £4,000 Lifetime ISA allowance, and you can access your money at 55 (versus 60 or when you buy your first property for a Lifetime ISA). The main disadvantages of a SIPP versus a Lifetime ISA is that at age 55, you can only withdraw 25% tax-free. With a Lifetime ISA, you can withdraw all your money tax-free at 60 or when you buy your first property.

SIPPs versus general investing accounts

Compared to a General Investing Account, the main advantages of a SIPP are that contributions come with tax relief and that all investment gains and income are tax-free. The main disadvantages of a SIPP versus a General Investing Account are that you cannot access your money until you turn 55 and at age 55, you can only withdraw 25% tax-free. With a General Investment Account, you can access your money at any time.

SIPPs versus private pensions

Compared to a normal or private pension, the main advantages of a SIPP are that you have more investment options. The main disadvantage of a SIPP against a normal pension is that you are responsible for managing your own money.

Some SIPP accounts and providers offer incentives like cashback when you transfer your SIPP.

If you want to transfer a private pension to a SIPP most SIPPs will help you transfer pensions free of charge and in some cases may cover some of your exit fees. However, not all plans let you take your money out and even if you can transfer, you will likely pay charges. The rules and fees will vary across providers, but the FCA is clamping down on exit fees. For example, St James’ Place has just removed exit fees. If you have a final salary (defined benefit) scheme with your employer with a pot of £30,000 or more, you will need the transfer approved by a regulated adviser, to ensure you do not lose out on significant pension benefits.

Low-cost SIPPs versus regular SIPPs

Low-cost SIPP pensions are do-it-yourself (DIY) pension accounts that have low fees. They are suited to those who are looking to minimise pension fees and charges.

Like regular SIPPs where you can also invest in commercial property and private companies, low-cost SIPPs offer tax relief and investment gains and income within the account are tax-free. One downside to low-cost SIPPs, however, is that they often offer fewer investment options than regular SIPPs.

SIPPs versus robo-advisors (digital wealth managers)

It is early days for the digital wealth management market but robo-advice pensions can offer more support to savers who want some control but are unsure of what to invest in. Conducted exclusively online, these are called SIPPs, but they are actually more heavily managed by the providers than traditional pension plans. Typically, robo advisors rebalance portfolios, make investment decisions and offer more advice, rather than leaving savers to their own devices. These may suit first-time SIPP investors not yet ready to make investment decisions.

How do you open a SIPP account?

Opening a SIPP is generally a straightforward process. Usually, you can open one online through a provider’s website. When you open a SIPP, you’ll need to fund your account. There are two ways to do this. One way is to make an initial contribution. The minimum investment for a SIPP varies among providers, however, in many cases, it is very low. The minimum SIPP investment with Hargreaves Lansdown, for example, is just £100.

The other way to fund your account is to transfer an old pension into your new account. To transfer an old pension, you will need to provide your new provider with a few details such as the name of your old provider, the policy type, your policy number, and the approximate value of your old pension.

When you contribute to a SIPP, the government provides you with tax relief on your contributions. When you receive tax relief, some of your money that would have gone to the government as tax goes towards your pension instead.

Once your SIPP is opened and funded, you can invest your money. How you invest is down to you. With a SIPP, you have full control over your investments. Most SIPP providers offer a wide range of investment options including UK and international shares, investment trusts, funds, exchange-traded funds (ETFs), and bonds. Some providers, however, offer more limited options. Most providers allow you to keep your SIPP savings in cash if you want to.

Can you open a SIPP for a child?

Yes, with a Junior SIPP. SIPPs are available to those aged between 18 and 75. For those under the age of 18, Junior SIPPs are available. With a Junior SIPP, you can contribute up to £2,880 per year and contributions are subject to 20% tax relief. The money is tied up until retirement age.

Another investment option for those under the age of 18 is the Junior stocks and shares ISA. In this account, all investment gains and income are tax-free. The Junior ISA has an annual allowance of £9,000.

Industry experts told us

"Self-Invested Personal Pensions are a tax-efficient way for DIY investors who like to grow their money by managing their own investments as generous tax relief is applied on contributions at the taxpayer’s marginal rate of income tax. The beauty of a SIPP is the control and flexibility they give investors, as they provide an extensive choice of investments including funds from many different companies under one roof. This makes your retirement savings more convenient to manage and monitor than having a scattered number of different pension plans, but without needing to sacrifice investment choices."

FAQs

The big advantage of saving into a SIPP when you’re self-employed is that contributions can be treated as a business expense. This means that saving into a SIPP can be very tax-effective. So, many SIPPs are well suited to those who are self-employed.

Those who have the time to manage and monitor their pension savings may want to consider Hargreaves Lansdown’s SIPP. Hargreaves Lansdown is the largest investment platform in the UK with 1.5 million clients. This SIPP offers access to a vast range of investments including domestic and international equities, over 3,000 funds, bonds, and more. One advantage of this platform is that it offers plenty of research and investment tools to help you make investment decisions. Another advantage is that the customer service is very strong. On the downside, fees are higher than those of some other SIPP providers.

Those who don’t want the hassle of managing their own money may want to go with a managed provider such as Wealthify. Wealthify is a robo advisor that offers a managed pension product. With Wealthify, you choose an investment style based on your risk tolerance. The advantage of investing with Wealthify is that it’s very easy to set up a pension. One downside, however, is that there are only a few investment options to choose from, for example, you cannot invest in individual shares.

Under current law you must be aged 55 or over to withdraw money from a pension, except under very special circumstances such as ill health. From 2028 the age limit will increase to 57 years.

There is no limit on the amount that you can pay into a SIPP annually. However, there is a limit on the amount you can contribute and receive tax relief on. This is known as the annual allowance and usually, it is either 100% of your taxable earnings or £40,000, whichever is lower. This limit applies across all your pension accounts and includes the value of any tax relief added to the contributions. Higher earners face a tapered annual allowance.

The Lifetime Allowance (LTA) is the total amount of money you can build up in your pension accounts while still enjoying full tax benefits. If you breach the Lifetime Allowance, you will pay a tax charge on the excess whenever you take income or withdraw a lump sum from your pension, or reach the age of 75 without having taken any benefits. The Lifetime Allowance is currently £1,073,100.

You can have as many SIPP accounts as you want. However, when you have multiple SIPP accounts, it can be harder to manage your money.

Yes. It is possible to have both a SIPP and a workplace pension. It’s also possible to have a SIPP and a private pension.

You can withdraw a lump sum from the age of 55. However, you can only withdraw 25% of your SIPP tax-free. The rest will be taxed at your normal income tax rate.

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