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Understanding Self-Invested Personal Pensions (SIPPs)
A Self-Invested Personal Pension (SIPP) is a type of personal pension that gives you greater control of how your retirement savings are invested. Unlike a workplace pension where your employer chooses the provider, a SIPP allows you to select and adjust investments yourself, giving you better visibility and more choice.
When you pay into a personal pension, your money is usually invested in stocks and shares. The value of these investments can rise or fall, so you might get back less than you put in. Returns aren’t guaranteed. Pension tax rules may also change in the future, and any tax benefits you receive will depend on your individual circumstances.
- A SIPP is a type of private pension wrapper that lets you choose your own investments, and consolidate your old workplace pensions into a single account for better easy management.
- SIPPs are tax-efficient retirement accounts with tax relief on contributions and investment growth that’s free from Capital Gains and Income Tax while inside the pension.
- In exchange for these tax benefits, your money is locked away until age 55 (rising to 57 in 2028), ensuring it is preserved specifically for your retirement.
What is a SIPP?
A SIPP is a private pension ‘wrapper’ that gives you flexibility over both your investments choices and how you manage old pensions. With a SIPP, you can:
- Consolidate: Combine old workplace pensions that you no longer contribute to and may not be working for you into a single account. Read our full guide on pension consolidation.
- Invest with control: Get full visibility and control over your investments within your pension.
How does a SIPP work?
A SIPP works in a similar way to other defined contribution pensions, but with added flexibility and often a wider range of investment choices. It functions like a tax-efficient retirement savings account. You contribute, and the government tops your contributions up with tax relief.
- Tax relief bonus: If you pay in £80, the government adds £20 in basic-rate tax relief to make your total contribution to£100. Higher and additional rate taxpayers can claim extra relief.
- Investments: Your contributions are then invested into your chosen assets with the aim of growing your money.
- Tax-efficient growth: As long as investments are held inside the SIPP, you pay no Capital Gains Tax or Income tax on any growth generated in the pension.
How to set up a SIPP
Setting up a SIPP is simple:
- Choose a provider: Look for a provider that offers clear fees and an investment offering that’s right for your retirement goals and level of experience.
- Fund your account: You can transfer your old pensions, set up monthly recurring contributions, or pay in a lump sum.
- Stick to your strategy: Choose investments that align with your goals and risk appetite. Some SIPPs require you to choose individual stocks, while many also offer ready-made solutions such as Target Date Funds. These funds automatically shift from higher risk to lower risk investments as you approach retirement.
Can I have a SIPP and a workplace pension?
Yes, you can have both at the same time. A common strategy used is to keep current workplace pensions to benefit from employer's contributions, but use a SIPP to consolidate all previous workplace pensions that are no longer being paid into.
Having a SIPP with those old pensions generally makes it easier to keep track of where each old pot is and more control on how it is invested
Read our full guide on workplace pensions.
How many SIPPs can I have?
Savers are not limited by the number of SIPPs they can hold. However, some people find it easier to keep everything in one place. Having a single SIPP can make it easier to get a better picture of retirement wealth and can often reduce the fees paid.
How much can I pay into a SIPP?
The two main limits you need to be aware of when paying into a SIPP are:
- The earnings limit: You can usually only receive tax relief on personal contributions up to 100% of your relevant UK earnings each tax year. For example, if you earn £30,000, you cannot personally contribute more than £30,000 and still receive tax relief
- The annual allowance: There is also a total cap of £60,000 per tax year (or 100% of your earnings, whichever is lower). This allowance includes all contributions - from you, your employer, and the government’s tax relief.
Read our full guide on pensions tax, relief and allowances.
What age can I draw my private pension?
The trade-off for the tax benefits of a SIPP is that your money is locked away until a set minimum age.
- Currently you can access your SIPP from age 55.
- From 2028 this will rise to age 57.
Once you reach this age you’ll have the options to:
- take 25% of the pot as a tax-free lump sum,
- buy an annuity (guaranteed income plan), or;
- leave the rest invested and withdraw the cash as you need (drawdown).
We’ll come back to each of these three scenarios later.
Read our full guide on retirement ages.
The State Pension
Whilst your workplace pension and SIPP help serve as your tools for building your personal retirement pot, you may also be entitled to the State Pension, provided you meet the qualifying criteria. This serves as a guaranteed foundation to your retirement income, with the amount you receive based on your National Insurance record.
In the next guide we’ll cover how the State Pension system works, and what you can expect to receive if you qualify.