All you need to know about SIPPs

Pensions & retirement 25 April 2022

You have more options than ever when it comes to saving for your retirement. The pension freedoms have given you greater control over your pension savings so it’s wise to consider all your options, including SIPPs. But what does SIPP stand for and how do they work?

To help you get up to speed, our in-depth guide will take you through the basics, including who they’re suitable for and what you can invest in.

What is a SIPP?

Self-invested personal pensions (SIPPs) are a type of do-it-yourself pension. They let you take full control and responsibility of how to invest and manage your pension savings.

While these benefits may sound appealing, SIPPs aren’t for everyone and there are downsides. Managing your own portfolio requires financial experience and confidence. It’s also a time-consuming process and, depending on the type of SIPP you choose, it may come with higher fees.

Here’s a quick overview of their pros and cons.

SIPP pros:

  • Manage your pension pot and decide how each investment is made
  • Greater choice of the types of investments
  • Tax relief on your contributions if you’re a UK taxpayer
  • Choose to manage your portfolio yourself or have it done by a professional
  • They’re usually managed via online platforms

SIPP cons:

  • Investment research and decision making is time-consuming
  • You must pay income tax on money you take out
  • You must be 55 or older to access your money
  • All investments come with risks and no guarantees
  • Many are execution-only and don’t include personalised advice

How SIPP pensions work

How does a SIPP work?

In a nutshell, a SIPP is a type of ‘pension wrapper’ that holds all your investments in one place. This ensures that all pensions follow the same guidelines on how and when you can access your funds. It’s also a tax-efficient way to save for retirement as your pensions will also be subject to the same taxation.

Many people choose SIPPS because they let them combine their pensions into one place. Doing so can make managing your pensions easier. But, it can also mean losing generous benefits such as guaranteed income with DB pensions or facing added expenses such as hefty exit fees.

How many SIPPs can you have?

To invest in a SIPP, you must be under 75 and a UK resident. You can open one if you’re an overseas resident but you won’t be eligible for tax relief on your contributions.

You can have more than one SIPP. Doing so could reduce your risk by spreading your investments across different pots. It can also help you gain access to a wider range of investment options. The downside is that extra SIPPs come with extra management fees, as well as added time to manage and track your investments.

Many people have both a workplace pension and a SIPP. Generally, it’s more beneficial to focus on contributing to your workplace pension first. This is because you'll gain employer contributions and tax relief.

But, if you’re still considering putting more money aside in one or more SIPPs, do your homework. Comparing charges and fees across all options can help you decide if it’s worth the added expense and time in the long-run.

Types of SIPPs

SIPPs fall into two types: Lite and Full SIPPs.

Sometimes called DIY or low-cost SIPPs, Lite SIPPs are ideal for people that have smaller pension savings to invest. They’re offered by many investment platforms and include a variety of investment options.

As their name suggests, charges are lower than Full SIPPs. This type is also usually ‘execution-only’, meaning the platform won’t offer any advice to help you choose your investments.

Full SIPPs offer the most choice for investors and include options such as commercial property. Added choice comes with a higher cost. So, it’s no surprise that these SIPPs are aimed at savvy investors that have big pots to invest. If you feel this type is right for you, you’ll need to get professional advice before making any decisions.

Which investments can you hold in a SIPP

What investments can I hold in a SIPP?

All SIPP providers are different. Depending on whether you choose a Lite or Full SIPP, you’ll have different options such as:

  • Cash
  • Commercial property
  • Company shares (both UK-based and overseas)
  • Bonds
  • Exchange-Traded Funds (ETFs)
  • Land and property
  • Shares
  • Offshore funds
  • Unit trusts and other collective investments

This isn’t an exhaustive list as your options will vary depending on your SIPP type and provider.

What happens to your SIPP when you die?

What happens to your SIPP depends on how old you are when you die. This also determines whether your SIPP is subject to inheritance tax.

For example, if you die before you reach 75, your beneficiaries will inherit your SIPP without inheritance tax liability. If you live longer than that, your beneficiaries have three options:

  1. Take the whole amount as a lump sum: they’ll pay their normal income tax rate on the entire amount
  2. Take many lump sums: they’ll pay their normal income tax on each instalment
  3. Take a regular income (if they’re dependents): they’ll have a regular income, which could take the form of either drawdown or an annuity and pay income tax on it

How much can I invest in a SIPP?

Your annual allowance means you can invest up to 100% of your earnings, up to £40,000. Provided you’ve had a SIPP for the entire period, you can carry this allowance over within the past three tax years.

If you’re a non-earner, you can also take advantage of basic rate tax relief. You’re allowed to pay in up to £2,880 each year into your SIPP and gain tax relief of up to £720.

When deciding how much to contribute don’t forget about your lifetime allowance, or the most you can invest whilst you’re alive. You’ll need to pay tax on any payments that exceed this allowance. To date, this is £1.073M for the 2021-2022 tax year.

When can I access my SIPP?

2015’s pension freedoms removed many of the restrictions on how you could take your pension money. Once you reach age 55, you’re free to take money from your pension, including SIPPs.

Depending on your circumstances, you may decide to:

  • Leave it alone: This can give you extra opportunity to let your pot grow further.
  • Take it all at once: You’ll be able to take the first 25% as tax-free cash.
  • Take 25% tax-free and buy a retirement product: Drawdown and annuities can offer benefits such as income for life or flexible withdrawals.

Check your pension plan’s rules before taking anything out. If you’re unsure, consult a financial adviser before making any decisions that may affect your future income.

What is SIPP pension guide

Is a SIPP right for you?

By now, you should have a good understanding of what a SIPP is and its benefits. SIPPs can offer a flexible way to control where your investments go and how they develop. They can be good options for people who:

  • Have a good understanding of investing
  • Can devote time to researching investments
  • Are working with a financial adviser
  • Have larger pension savings or plan to make big contributions
  • Are prepared to manage their own funds and performance

All investments come with risk, and SIPPs are no different. Investing without taking FCA-regulated financial advice puts you at risk should things go wrong. And while the Financial Services Compensation Scheme covers up to £85,000 if your provider goes bust, it’s not a guarantee.

SIPPs are complex products and there’s a lot going on behind the scenes. The way your investing platform holds your money and how much capital it holds in reserve may affect how much you're compensated.

If you’re still unsure of whether a SIPP is right for you, seek professional financial advice. Working with a financial adviser can help you understand all your available options and assess any risks involved.

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