What is a SIPP?

Find out what a SIPP is, how they work, tax relief, withdrawal rules and how they compare with ISAs

A SIPP (or Self Invested Personal Pension) is a more hands-on pension that gives you more control over how you save for the future. In this article, we explain what is a SIPP, how they work and why a SIPP pension might be right for you.

What is a Self Invested Personal Pension?

Let's start with the basics. What is a SIPP and how does is it different from other private pensions?

Put simply, a SIPP gives you more control over the investments within your pension. Whereas other private or workplace pensions aim to help you save with a pre-built set of pension funds, a SIPP lets you pick individual investments yourself. You have complete control over:

  • where your money is invested
  • how you allocate money between investments
  • when/if you change your level of risk
A SIPP lets you choose exactly where your money is invested.

How does a SIPP work?

As you might imagine, SIPPs are mainly for experienced investors with the time and know-how to pick the investments that are right for them. At its roots, a self-invested personal pension functions like other defined contribution pensions. You make regular or ad-hoc payments into your pot which hopefully grow over time. You can then access your savings starting from age 55 - rising to 57 in 2028.

With a SIPP you can choose and manage investments yourself or pay an independent financial advisor to help you. If you decided to to pick a SIPP yourself, the provider will charge you a fee (or fees) to use their service. These can include:

  • Platform fees (typically, to use the website – or platform – where you hold an account to manage your investments).
  • Holding charges - fees providers may charge for holding funds on your behalf.
  • Dealing fees - if you're buying and selling shares, the SIPP provider may charge you transaction or dealing fees.

The actual charges you pay will vary by provider, as will your investment options. It's always best to shop around to find the right provider for you.

SIPP investments explained

The power of a SIPP really shines in its variety of investment options. With a SIPP, you can invest your money in a huge array of financial instruments, including:

  • Stocks and shares
  • Government bonds
  • Commercial property
  • Unit trusts
  • Exchange-traded funds (ETFs)

Again, unlike other pensions, SIPPs give you the freedom to buy and sell all of these investments (and more) whenever you like.

SIPP tax relief

As with any private pension, you'll receive certain tax benefits from your SIPP. To encourage people to save for the future, the government offers:

  • tax relief on everything you pay in
  • tax efficiency on your savings (as money in your pension pot grows free from UK income tax and capital gains tax)
  • the option to take out 25% of your pension pot as a tax-free cash lump sum.

With a SIPP, you can make regular contributions every month, one-off payments, or a combination of the two.

Whenever you contribute, you'll get tax relief on your payments. For basic rate taxpayers, every £100 you pay in, the government automatically adds £25 as a tax relief bonus. If you’re a higher or additional rate taxpayer, you can claim further tax relief in your self-assessment tax return.

UK pension allowance means that you'll only be eligible for tax relief on contributions up to £60,000, or 100% of your earnings per tax year, whichever is lower.

There are a few other limits that will impact your SIPP contributions too, particularly if you're a high earner - head to our guide on pension contribution limits for more.

SIPP withdrawal rules

You can start taking money out of your SIPP pension at 55 (rising to 57 in 2028). The first 25% is tax-free. You can withdraw it as a cash lump sum, take it in smaller chunks or withdraw a regular amount as an income. You could also use it to buy an annuity to provide a guaranteed income for life. Or you can do a combination of these options - we explain everything you need to know about pension withdrawal here.

The law and tax rates may change in the future, and the value of tax relief will depend on your individual circumstances.

Can I have a SIPP and a workplace pension?

Yes, you can open and pay into a SIPP while also paying into a workplace pension. Some savers like to do this to have more control of the investments inside their pension, while still taking advantage of employer contributions.

SIPP vs ISA: Which is better?

One of the most popular questions for modern investors is where to put their money. Should set up payments into a SIPP or ISA - or something else entirely? A SIPP pension is of course a longer-term investment - but this also comes with a host of benefits, including higher allowances and better tax relief.

Not sure which one is right for you? Check out our article "Are pensions worth it?" or take a look at our pension vs ISA comparison for the complete breakdown.

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1. Get a Penfold account by registering your details online or with our app.

2. Transfer an existing pension, or make a one-off or recurring payment (pause or adjust any time).

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