A Guide to a Self-Invested Personal Pension (SIPP)

A SIPP is sometimes referred to as a ‘DIY’ pension as you get more involved in setting up and managing this kind of pension than you would with other types of pensions. They are probably best suited to individuals with greater investment experience who are happy to do their own research.

In this article, our team of independent financial advisers at PIL Southampton explains what they are and how they work.

What is a SIPP?

A self-invested personal pension (SIPP) is a pension that you can set up yourself. It gives you the option to decide how much money you want to invest, and how that money is invested. This usually means that you have a wider choice of investments to choose from than you would with other pensions.

You can either manage the pension yourself – making your own investment selections, you can pay a financial adviser like the expert team at PIL Southampton to guide you, or you could let the pension provider’s in-house advisory team choose on your behalf.

A SIPP is a useful way to combine several existing pension pots and it can flex to meet your changing needs. For example, you can add large one-off sums and take payment holidays as and when it suits your circumstances.

SIPPs can usually be opened by anyone over the age of 18 and you can also open a SIPP on behalf of a younger family member, i.e. a child or grandchild. Unless you are transferring an existing pension across into a SIPP, you will not usually be able to open a SIPP after the age of 75.

Can I have both a SIPP and a workplace pension?

Yes, you can have as many pensions as you like, including a range of workplace and personal pensions.

Is a SIPP better than my employer’s workplace pension?

Usually, paying into a workplace pension set up by your employer works out more favourably for you because the charges applied to manage a workplace pension are generally lower. Also, your employer will normally add extra contributions, and may even pay more if you pay more. This is called contribution matching.

How many SIPPs can I have?

There is no limit to how many SIPPs you can have. Do bear in mind, however, that you will be paying charges to every pension provider. It can also be complicated choosing your own investments for a SIPP, so consider how much time and expertise you’ve got to spend on your pensions before you decide to open multiple SIPPs.

How does a SIPP work?

A SIPP is a defined contribution pension, which means that the amount you get out of it is dependent on how much you pay in to it, how your investments perform, what fees your provider takes and how and when you choose to take your pension out.

Tax relief boosts your SIPP contributions

When you pay into a pension, the government usually adds a top-up payment, known as tax relief – the money that you would otherwise pay in the form of Income Tax.

For basic rate taxpayers, this means that most pension providers will automatically claim 20% tax relief on your behalf, so you will only be paying £80 for every £100 that is invested in your pension.

Higher rate taxpayers can claim their extra tax relief by contacting HMRC or completing a Self Assessment tax return. If you’re paying 40% Income Tax, you will only be paying £60 for every £100 pension contribution.

You can usually get tax relief on all your pension contributions until you reach 75 years of age, as long as you don’t pay in more than you earn and as long as the combined amount you pay into all your pensions doesn’t exceed the annual allowance, which is currently £60,000.

At the time of writing, anyone earning less than £3,600 can get tax relief on up to £2,880 of their pension contributions.

How are my investments chosen?

If an independent financial adviser like PIL Southampton, or a pension provider, is making your investment decisions, they will take your attitude to risk into account. If you are choosing your own investments, you should also keep your attitude to risk front of mind. 

The investment options you have will depend on your provider, but you will typically be able to invest in a variety of funds, government and corporate bonds, company stocks and shares and commercial property and land. 

Note: If you run a business and you need business premises, investing in commercial property through your SIPP can be particularly useful as you can buy the business premises through your pension, which will then benefit from any increase in the property’s value, as well as receiving the rent you will be paying on the premises.

Investment growth is the key aim of any investment, including pensions, although growth is never guaranteed and the value of investments can always go down as well as up. 

Whether you have a better chance of investment growth by picking your investments yourself, or by having your financial adviser or SIPP provider choose your investments and manage your money, is hard to say. You might be financially confident and spend a lot of time researching the marketplace and enjoy making your own investment decisions. Or, you may be more comfortable putting these investment decisions in the hands of a SIPP provider or financial adviser.

The pension provider will need to cover the costs of investing on your behalf, which will normally include an annual management fee, and charges for making any changes to your investments. All their charges are likely to be taken from your pension pot.

When can I take money from a SIPP?

You can currently take out money from a SIPP at age 55 onwards. This minimum age is rising to 57 from the 2028/29 tax year. These are the same ages that apply to all pensions. There is an exception to this age rule if you need to retire early due to ill health.

Although you can withdraw money from your pension from the age of 55, many pension schemes are designed for the pension being paid out from the age of 65. 

When you choose to take out your pension, you will be able to take out up to 25% as tax-free cash. With the rest, you have several choices:

• Take the rest as one or more lump sums.
• Set up a flexible income that you can change or stop whenever it suits you.
• Convert the 75% balance into guaranteed income.
• Leave the balance of your pension where it is, continuing to invest it.

How is a SIPP different to other personal pensions?

A SIPP gives you a wider range of investment options to choose from, but it requires more involvement. Other options include standard pensions which offer ‘ready-made’ investment funds you can choose from. A stakeholder pension is another type of pension available to you. These alternative pension options have lower minimum payments, capped charges and fee-free transfers. They usually offer a variety of investment funds for you to choose from.

How do I invest in a SIPP?

Most SIPPs are managed through investment platforms, which allow you to buy and sell investments. There are ‘DIY’ platforms that enable you to manage your own investments, and there are ‘Robo’ platforms where you tell them your preferences and attitude to risk and they manage your investments for you.

It is most SIPP providers’ default option to manage your money on your behalf. You can use their online platform or call them to select and change your SIPP investments. 

What charges do I need to pay?

All investments incur management charges and fees. Fees for a SIPP tend to be higher than those charged with a personal pension.

As you are in control of your SIPP, you can change where you are investing as often as you like, however you are likely to be charged fees every time you do so.

How PIL Southampton can help you 

Our friendly, independent team of expert financial advisers will be happy to talk you through your SIPP options and guide you on your investment choices. They will take the time to get to know you and your individual financial circumstances so that they can help you to make the best decisions for you.

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.