Everything you need to know about SIPPs

A self-invested personal pension, or SIPP, is essentially a ‘DIY’ pension, where you choose exactly where your money is going to be invested.

Here, we explain how they work, the costs involved, and who they’re suitable for, so that you can decide whether a SIPP is right for you.

How does a SIPP work?

A SIPP is a type of personal pension that allows you to invest in a wide range of investments from different providers, rather than only having access to the pension funds offered by just one provider. As with other kinds of pension, your returns will be protected from income tax, tax on dividends and capital gains tax, and you’ll also receive tax relief on your contributions.

SIPPs are defined contribution pensions, which means the amount you’ll end up with at retirement is dependent on how much you’ve paid in and how the investments your money has gone into have fared.

What can SIPPs invest in?

SIPPs usually offer a wider choice of investments than other types of personal pension. For example, whereas you’ll typically be given a range of funds to choose from in a personal pension, with a SIPP you’d normally be able to choose individual companies to invest in, as well as a wider range of funds and more sophisticated alternative investments. 

Who should consider a SIPP?

This type of pension typically suits people who are comfortable managing their own finances and who are more experienced investors. If you’d rather leave your pension investment choices up to the experts, you may be better off opting for a standard person pension, which will usually offer you a range of different funds to invest in. You can find out more in our article Where is my pension invested?

What are the different types of SIPP?

There’s a wide range of SIPPs to choose from, and you can usually open one with a minimum investment of around £5,000. You may be able to pick from a range of ready-made portfolios if you don’t want to have to select individual investments yourself. For example, Vanguard offers a SIPP with no fund dealing charges and an annual charge of just 0.15% of the total amount held in the SIPP. Retirement savers can choose from Vanguard’s range of 75 low-cost funds and its range of ready-made portfolios designed for retirement, known as the ‘Target’ Retirement funds.

Alternative options include the Hargreaves Lansdown SIPP which has a higher annual charge of 0.45% but offers a much wider investment choice of more than 2,500 funds and ready-made portfolios. Other providers of good value SIPPs include AJ Bell and Interactive Investor.

Full SIPPs usually have steeper charges than low-cost SIPPs, mainly because they provide access to a wider range of investments. According to consumer association Which? full SIPPs are only really suitable for those with commercial interests or large pension funds, and the typical sum invested in this type of SIPP is usually between £150,000 and £450,000.

Can I consolidate my other pensions into a SIPP?

If you have several defined contribution pensions, perhaps because you’ve worked for a number of different employers over the years, consolidating them into a single SIPP can make managing your money more straightforward, as you’ll only have one pension statement to review each year and one set of investments to keep an eye on, and you might also be able to reduce the charges you pay.

It’s important however, to always check that by transferring your pensions, you are not giving up valuable pension guarantees – for example transferring a final salary pension into a personal pension plan is very rarely the right decision. You’ll also need to check whether any exit charges apply to move away from your existing providers. You can find out more about consolidating pensions in our article Should I consolidate my pensions? and about final salary pensions in our article on transferring final salary pensions. 

Bear in mind that when you transfer your pensions, this will usually mean you’ll be “out of the market” for a short time, as your investments will need to be sold and the cash used to buy investments on the new platform you’re moving to.

You may be able to do an ‘in specie’ transfer, which means moving your investment directly from the funds they are currently held into to the same funds on a new platform.

Is there tax relief on SIPPs?

Yes, as with any other type of pension, contributions you make into a SIPP benefit from tax relief. What this means in practice is that when you pay into your SIPP, the government will also chip in.

The amount of pension tax relief you can claim is tied to your rate of income tax.

  • Basic-rate taxpayers get 20% pension tax relief
  • Higher-rate taxpayers can claim 40% pension tax relief
  • Additional-rate taxpayers can claim 45% pension tax relief

You can find out more about pension tax relief in our guide to How pension tax relief works. Bear in mind that there are limits to the amount of tax relief you can claim on your contributions – these are explained below.

How much can I pay into a SIPP?

The amount you can save into a pension and earn tax relief on is capped each year, known as your Annual Allowance. There’s also a Lifetime Allowance, which is the total amount you can save into your pension without being hit by a tax charge.

You can pay in up to 100% of your earnings into a SIPP each tax year, up to a maximum Annual Allowance of £40,000.

You can also ‘carry forward’ any unused Annual Allowance from the last three years as long as you were enrolled in a pension scheme during that time. This can be helpful if you have a big lump sum that you want to invest one year.

If you’re a particularly high earner, you may get a lower Annual Allowance. For every £2 of income you receive over £240,000, you’ll lose £1 of your annual allowance, down to a minimum of £4,000. If you pay more than the Annual Allowance into your pension, you’ll have to pay what’s known as an Annual Allowance charge. The amount you’ll have to pay will depend on how much taxable income you have, and the amount of your pension savings that is in excess of the Annual Allowance. You’ll need to work out the rate or rates of tax that would be charged if your excess pension savings were added to your taxable income. HMRC has a useful Annual Allowance calculator to help you work out whether you have to pay tax on your pension savings.

It’s worth noting that once you’ve started taking money out of your pension, your Annual Allowance falls from £40,000 to £4,000 and becomes known as the Money Purchase Annual Allowance (MPAA). Learn more about this in our article What is the Money Purchase Annual Allowance? 

The Lifetime Allowance is the maximum you can save in your pensions over your lifetime, without having to pay any extra tax charges when you take money out of them. It doesn’t include any income coming from the State Pension.

In the current 2021/22 tax year, the Lifetime Allowance is £1,073,100. The Lifetime Allowance usually rises in line with the annual rate of inflation, but the Chancellor announced in the March 2021 Budget that it will be frozen at its current level until the end of the 2025/26 tax year.

You can find out more about how pension allowances work in our article Understanding your pension allowances.

When can I access the money in my SIPP?

If you have a SIPP or any other type of defined contribution or money purchase pension, under pension freedom rules introduced in 2015, you can usually access this money once you reach the age of 55. There’s a 10-year gap between pension freedom age and the State Pension age, so the age at which you can access your retirement savings is due to rise to 57 when the State Pension age reaches 67 in 2028.

If you’re 55 or older, accessing your pension might seem like an attractive way to fund early retirement, but there are several things to consider before you do this. Firstly, it means you will miss out on any future investment gains from the money you take out of your pension. You will also have less money saved away for the future and without an income coming in, this will become very hard to replace again. As mentioned above, there’s also the reduction in the Annual Allowance to consider – if you start taking pension income flexibly, it can trigger the Money Purchase Annual Allowance, which would restrict the amount you could contribute to your pension in future to £4,000. Find out more in our article What is the Money Purchase Annual Allowance? 

You will also need to think about the tax implications of taking money out of your pension. For example, normally, you can take 25% tax-free from your pension, with the remaining 75% subject to your marginal rate of income tax. This means if you take a large amount out of your pension in one go, you could end up moving into a higher tax bracket, potentially landing you with an unexpected tax bill.

It could also affect any means-tested benefits you receive. Learn more about this in our article How lump sum payments and savings can affect your benefits.

If your income has been hit by coronavirus, it might be tempting to access your SIPP savings to help make ends meet. You can find out more about the pros and cons of doing this in our article Should I use my pension to boost my income during the pandemic? 

Which SIPP provider is best?

The best SIPP provider for you will depend on the investment options you want, how much you want to pay, and whether you have a smaller or larger amount to invest. There are plenty of SIPP providers to choose from, but below is a rundown of what some of the better known names offer and how much they charge. Bear in mind that this is only a brief overview and other costs may apply. Seek professional financial advice if you need help choosing a SIPP provider.

How much do SIPPs cost? Different providers compared

Provider: Vanguard

What they offer: Vanguard has very low charges. There are no fund dealing charges, and there’s an annual charge of just 0.15% of the total amount held in the SIPP (capped at £375 a year). However, you’re restricted to Vanguard’s range of 75 low-cost funds and their range of ready-made portfolios designed for retirement, known as the ‘Target’ Retirement funds.

There are no extra fees when you want to start withdrawing your money.

Provider: Hargreaves Lansdown

What they offer: Hargreaves Lansdown isn’t the cheapest SIPP provider, but has lots of investment options to choose from including more than 2,500 funds and a wide range of ready-made portfolios.

Annual management charges for funds are tiered depending on how much you invest. You’ll pay:

0.45% for 0-£250k,

0.25% for the next £250k-£1m

0.10% for the next £1m-£2m

0% on amounts over £2m

The annual charge for shares is 0.45% (up to a maximum of £200)

There’s no charge for buying or selling funds, but if you buy or sell shares, you’ll be charged £11.95 for each of the first nine deals you make. This falls to £8.95 per deal for the next 10-19 deals, and £5.95 per deal for 20 deals upwards.

There’s no fee to transfer out.

Provider: AJ Bell

What they offer: If you have a small amount to invest, AJ Bell has competitive annual management charges for those with smaller portfolios. Costs are tiered depending on how much you invest. You’ll pay:

0.25% for £0 to £250k

0.10% for the next £250k – £1m

0.05% for the next £1m-£2m

0% on amounts above £2 million

Buying and selling funds cost £1.50 per trade.

Annual charges for shares are 0.25% (max quarterly charge £25)

Share-dealing charges are £9.95. This reduces to £4.95 if you made 10 or more trades in the preceding month.

Provider: Interactive Investor

What they offer: If you have a larger portfolio, Interactive Investor can be a cost-effective option. That’s because rather than having tiered charges based on the size of your investment, it has a flat £120 annual administration fee, regardless of how much you hold in your SIPP. Currently, the admin fee is waived for the first six months (subject to terms and conditions) so you’ll only pay £60 in the first year.

There is also a £9.99 a month service plan fee and you’ll get one free trade a month. Additional trades are charged at £7.99 per trade, whether you’re buying or selling funds or shares. There’s no charge if you’re making regular investments, and there is no fee to transfer out.

Personal pension or SIPP?

If you’re not an experienced investor, and don’t have access to a workplace pension, a stakeholder or personal pension may be a better option than a SIPP.

A stakeholder pension is a type of personal pension that allows you to make small contributions, typically starting from £20 a month, so may be a good option if you can’t afford to put away a large amount each month.

They are often flexible too, so you may be able to stop and start your contributions when you need to.

Alternatively, if you can afford higher minimum contributions, you might decide to go for a personal pension, which may offer a wider range of investment funds to choose from.

It’ll be up to you to pick the type of funds where your retirement savings are invested, so you’ll need to think carefully about how much risk you’re prepared to accept. Pension providers will make it clear which investments are likely to suit those with a strong appetite for risk and which will be more appropriate for those who are more cautious.

There are several online investment platforms, sometimes known as ‘robo-advisers’, such as Nutmeg.com, Wealthify.com, and PensionBee.com, which allow you to sign up for or transfer personal pensions and then choose from a range of ready-made pension portfolios designed to suit different approaches to risk. Make sure you read the small print carefully before signing up and check the charges so you understand exactly how much you’ll pay.

If you’re looking to set up a pension for the first time, you can learn more in our article Saving into a pension for the first time.

Find out more about the different types of pension that are available to you if you can’t pay into a company scheme in our article Self-employed? Your pension options explained.

Where to go for SIPP advice

A good financial advisor can help you decide which SIPP to go for and which investments to hold in it, providing you with specific recommendations based on your individual circumstances.

If you think this would be helpful you can find a local financial advisor on VouchedFor or Unbiased.co.uk or check out our guide on How to find the right financial advisor for you.

If you think you might be interested in speaking with a financial advisor, VouchedFor is currently offering Rest Less members a free pension check with a local well-rated financial advisor. There’s no obligation, but once you’ve had your check, the advisor will discuss the potential for an ongoing paid relationship if you think it might be useful to you.

Do you pay into a SIPP, or are you still deciding which type of pension to go for? We’d love to hear from you. You can join the money conversation on the Rest Less community or leave a comment below.

Links with an * by them are affiliate links which help Rest Less stay free to use as they can result in a payment or benefit to us. You can read more on how we make money here.

If you’re considering getting professional financial advice, VouchedFor is offering Rest Less members a free pension check with a local advisor. There’s no obligation but once you’ve had your review, the advisor will discuss the potential for an ongoing paid relationship if you think it might be useful to you.

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