Self-invested personal pensions: SIPPs explained

What is a Self-Invested Personal Pension?

A self-invested personal pension is a type of personal pension that instead of being managed by your pension provider is managed by you. 

This type of pension was designed for people that want to manage their own funds. With this type of personal pension, you are free to switch your investments as you like. 

This type of pension is called 'DIY pension'. 

What can SIPPs invest in?

With SIPPs, you can invest in: 

• Stocks and shares in the UK and overseas
• Government investments in the UK and overseas 
• Commercial properties (which is one of the biggest differentials of SIPPs)
• Unit trusts
• Deposit accounts with banks
• Insurance company funds
• Investment trusts

And many others depending on your SIPP providers. 

What can’t SIPPs invest in?

Usually, SIPPs can’t invest in residential property due to the tax advantages of this type of pension scheme. 

How do Self-Invested Personal Pensions - SIPPs work? 

A self-invested personal pension is not the right choice for everyone. If you are someone that likes and understands how to invest, this is a great option. 

If you decide to open a SIPP, you need to be prepared to dedicate some extra time to run your own pension. With a SIPP, you are your own pension manager. 

IMPORTANT NOTE: If you don’t think a SIPP is for you, learn more about how other personal pensions work. 

What are the types of SIPPs? 

There are two types of SIPPs: 

• Low-cost SIPPs

With this type, you don’t get any advice from your SIPP provider, that’s why it’s cheaper to get this one. The choices of investments can be smaller as well. 

• Full SIPPs

With this type, you have the support of a team from your provider that is there to help you make decisions. And you also have access to more choices of investments. You will have more charges in this type. 

IMPORTANT NOTE: Even if you can count on the help of advisers, you are the one making decisions about what to buy or sell and when to do it. 

What's the difference between a standard personal pension and a SIPP?

The main difference between a standard personal pension and a SIPP is that in the first one your pension provider does everything for you and you don’t need to worry about anything but paying every month. 

On the other hand, a SIPP is a type of personal pension where you need to be your own manager, so you have more work because when you make a monthly payment, you also need to decide where you want to place this money in your pension. 

How are SIPPs managed?

You can easily manage your SIPP online, as you will have a login and a password to access your account whenever and wherever you want. You can also manage it by phone. Managing your SIPP works pretty similar to online banking. You can easily buy and sell investments at the click of a button. 

How do I access my SIPP?

You will have a login and password to access your SIPP account whenever you want. But you can only access your whole pension pot once you are 55 years old. According to the law, at the moment, you can take 25% of your investments free of tax, the other 75% will be taxed. You can either take it all once or receive it as monthly payments. 

How to open a SIPP account

What is a SIPP account? 

A SIPP account is your SIPP pension pot. When you open a SIPP account, you are automatically opening a SIPP pension pot. You can usually manage this account online, accessing it by your SIPP provider’s official website. 

How to set up a SIPP account? 

It’s very easy to set up a SIPP. You first need to choose your SIPP provider. Then you need to create a login and a password. You also need to choose what type of SIPP you want. After that, you just need to start putting money in and selecting your investments. 

How do you know if a SIPP is for you? 

A SIPP is for you if you know what your retirement goals are, meaning you know how much money you need to have to retire comfortably. You are a person that is aware of the current trends and how they can affect the market. You are someone with investment experience. 

IMPORTANT NOTE: The value of your pension will change according to the performance of its investments, that is why it is so important to understand investments, otherwise you could end up with less money than when you started. 

Ready-made SIPPs

Some SIPPs providers offer a small range of ready-made SIPPs that you can pick from. In this case, your provider will manage it for you. This can be an excellent option if you want fewer responsibilities and the help of experts. Also, you will probably pay more on fees. 

What are the pros and cons of SIPPs?

SIPPs have pros and cons and below we have listed them for you: 

Pros of SIPPs 

• More control over your pension, as you are the one managing it. 
• Good government incentives to save more for your future. 
• More flexibility because you have more investments to choose from and the freedom to buy and sell whenever you want. 
• You can pay for it until you are 75 years old. 

Cons of SIPPs 

• If you don’t have a lot of experience with investments, it might be a little complicated to know what is the best share to hold. Although, if you get a full SIPP, you can count on a team of advisers. You could also get a ready-made SIPP. 
• This time of pension is more time consuming than other personal pensions as you need to take care of it frequently as the manager. 

What are the SIPPs tax benefits?

A SIPP will offer three tax benefits: 

• Tax-free investing

When you put money in, you get income tax relief according to your income tax rate. If you are a basic-rate taxpayer you receive 20% of tax relief. If you are a higher-rate taxpayer, you receive 40% of tax relief.

• Pension tax relief

When you take money out, the tax relief for SIPP is 25%. So if you have accumulated £100,000, you will be able to receive £25.000 free of taxes and will only pay tax on the £75,000 left.

• Free from inheritance tax

Depending on your case, when you die, your beneficiaries can inherit your pension without the need to pay any extra tax but the income tax, which you would pay as well like when you were alive. 

IMPORTANT NOTE: Taxes can change according to each person’s case. 

How much is the SIPP tax relief?

For SIPP investments, you have tax relief when you put money in and when you take money out. 

When you put money in you get income tax relief according to your income tax rate. If you are a basic-rate taxpayer you receive 20% of tax relief. If you are a higher-rate taxpayer, you receive 40% of tax relief (this is not applied automatically, you need to request it via a self-assessment tax return.)

When you take money out, the tax relief for SIPP is 25%. So if you have accumulated £100,000, you will be able to receive £25.000 free of taxes and will only pay tax on the £75,000 left.

 The tax calculation on the money left will depend on how you choose to take your money out. 

IMPORTANT NOTE: Pension tax is a type of income tax. Learn more about income tax here. 

How much do SIPPs cost? 

The SIPPs cost will depend on how much you invest in. 

What are the charges of SIPPs providers?

There are a couple of charges of SIPPs providers: 

• Annual management fees 

These charges are pretty common. They can be either a percentage of your entire pension pot per year or a fixed annual payment. 

• Dealing fee

These charges are also pretty common and they are usually around £10 to £15. Every time you buy or sell your investment in your pension, you pay a dealing fee.

• Exit fee

If you decide to transfer your SIPP to another provider, you might need to pay an exit fee. This can be around £25 per shareholding. So the more shares you hold, the more you will pay. In some cases, it’s not worth the cost to transfer your SIPP to another provider. 

• Drawdown fee 

If you decide to take money from your SIPP, you will pay for a drawdown. This will charge according to how frequently you receive your payments. 

IMPORTANT NOTE: Before getting a SIPP, research about all the fees the provider can charge and go for the one that charges fewer fees. 

How do I pay into SIPPs?

This will depend on how you want to pay into your SIPP. You can do it regularly or one-off payments. 

IMPORTANT NOTE: It’s always better to do regular payments to create the habit of investing in your future. The more you pay in, the more money you will have for your retirement. 

How much can be paid into a SIPP each year?

Because SIPP has  25% tax relief, you are limited on the amount of money you can pay into a SIPP every year. This amount will depend on the specific tax year. At the moment, you can put up to £40,000 per year. 

IMPORTANT NOTE: This can change depending on how high your income is. 

FAQ