It’s easy to get bogged down in the vernacular around pensions, but some of the worst jargon actually masks some fairly simple concepts and products. To make sure you’ve got your retirement fund sorted, there are a few things that it pays to get your head around. One is the SIPP, which stands for Self-Invested Personal Pension. Here’s an explainer on what it is and how it works.
What is a SIPP?
SIPPs are DIY pensions that you manage yourself.
What are SIPPS for, and how do you know if a SIPP is right for you? A SIPP is potentially useful for anyone who wants to control their own pension pot. The main selling point of a SIPP is that it puts you in the driving seat. You choose your own underlying investments, and you have the flexibility to change your investment mix and reduce or increase contributions as you wish. A SIPP usually gives you a wider choice of funds and shares than you would get in other types of pension. They are easy to set up and run.
Anyone under the age of 75 can pay into a SIPP. You can have one even if you already have a workplace pension, but for most people the benefits of the workplace pension (ie that your employer pays in too) will outweigh the benefits of a SIPP (such as tax efficiency and investment choice).
They are useful for self-employed people who don’t get the benefit of a workplace pension but still want to save for their own retirement and get valuable tax breaks.
What are the different types of SIPP?
The one we are talking about in this piece is the low-cost or lite SIPP. Fund platforms or brokers offer these on an execution-only basis, which means they don’t give you any advice, you just pick your investments and they make the trades for you. You don’t need a financial adviser to have one of these SIPPs, and they tend to be used by people with modest-sized savings pots.
Alternatively, you can buy a readymade SIPP from many different providers in the marketplace if you don’t feel comfortable choosing your own funds. Robo-advisers (also called digital wealth managers) such as Nutmeg and Wealthify now offer pensions like these which they manage on your behalf. So, while you control the amount of money you put in and when, and you can monitor your portfolio whenever you like, you pay a fee for the provider’s investment team to manage the money for you. This includes rebalancing the underlying investments (which are often low-cost passive funds) to keep them in line with your attitude to risk, which you will have told them about at the start.
There is also something called a full SIPP, which gives you the option to include the full range of investments, including commercial property. These will require professional advice and will come with higher charges. They are suitable for sophisticated investors with large pots of investable assets.
How do SIPPs work?
A SIPP is a type of personal pension that gives you greater investment choice compared to other types of schemes, such as workplace schemes which may have a more restricted number of fund options to choose from. You can open one through a fund platform or supermarket, and it works in a similar way to a Stocks & Shares ISA. You choose your own investments, how much to contribute and when, and your portfolio then sits within the SIPP’s tax-efficient ‘wrapper’, so you don’t pay income tax or capital gains tax on your investment returns. SIPPs are also tax-efficient because you benefit from tax relief on your contributions – more detail on this below. When you pay into a SIPP, your money is locked away until you reach the age of 55. At this point, you have a number of different options for taking the money out.
How much can I contribute to a SIPP?
You can pay in as much as you earn, up to £40,000 a year – this is the annual allowance. You can make regular or one-off payments, and many schemes will allow you to pay in low minimum investments.
How do I pay into a SIPP?
Usually you’ll be able to set up a regular direct debit or standing order, or pay in a lump sum via bank transfer or debit card.
Who can contribute to a SIPP?
You, obviously, but your employer or someone else can also pay in on your behalf. A parent or guardian can set up a Junior SIPP on behalf of a child. If you are the director of a limited company, you can contribute to a SIPP through your business and it would be classed as a business expense. This reduces your taxable profits so you pay less corporation tax.
How can I open a SIPP?
If you want to open a brand new SIPP, the easiest way will be through your chosen provider’s website. To choose a provider, you can read our independent research and reviews, have a look at comparison sites or best-buy tables to find one that meets your requirements, whether that’s an opening bonus, wide investment choice, cashback, low charges, or readymade options. Then usually it’s just a case of filling in your details, depositing some cash and selecting your investments.
What if I want to transfer to a SIPP?
You can transfer one or more existing pensions into a SIPP at any time, you don’t have to wait until you’re 55, because you’re not actually accessing the money, just moving it. If you have a number of small pension pots from previous jobs, you can transfer them into a SIPP to consolidate all your pension pots into one, making them easier to manage. If you’ve got a defined contribution pension pot that you want to transfer to a SIPP, you can usually do this yourself. Similar to switching banks or utility providers, you give your details, authorise the move and then the providers arrange the switch between them. If you have a pension pot that offers certain guaranteed benefits, such as a defined benefit pension, you must take financial advice if your pot is worth more than £30,000. If it’s worth less than this, you probably should take professional advice anyway, because transferring will mean you lose the benefits and this won’t be a smart move for a lot of people. Although advice comes with a price tag, it could help you avoid an expensive mistake. You can also transfer an existing SIPP to another SIPP run by a different provider, for example, if you find one with more competitive fees. For more information, read our guide ‘Should I transfer my SIPP?’ here.
Can a SIPP be inherited?
Yes, you can name anyone you like as a beneficiary who will receive your SIPP when you die. Pensions don’t form part of your estate so they won’t be covered by a Will. Your pension provider will give you the option to name one or more beneficiaries, and this can include charities. Your beneficiaries can take the money as cash, leave it invested or take an income. Whether they pay inheritance tax on your SIPP depends on whether you are under or over the age of 75 when you die, and whether your pension money is transferred to your beneficiaries within two years of your death.
What can SIPPs invest in?
Whatever you like. You can hold individual shares and bonds in a SIPP, as well as funds, investment trusts and passive funds such as ETFs (exchange-traded funds). You can even hold commercial property in a full SIPP, but not residential property.
Benefits of opening a SIPP
One of the key benefits of paying into a SIPP, aside from the peace of mind you get from taking action to fund your later years, is that pensions come with tax breaks. When you pay into a SIPP, you automatically get basic rate tax relief from the government of 20% on your contributions. If you are a higher rate or additional rate taxpayer, you can get an extra 20% or 25% tax relief, but you don’t get this automatically, you have to claim it back through your self-assessment tax return.
Plus, when the time comes to start taking money out of your SIPP, you get the nice perk of being allowed to take 25% of your pot as tax-free cash.
How much do SIPPs cost?
When you’re choosing a SIPP, it’s important to take SIPP fees and charges into account, although this is probably not the only factor that’s important to you. You will probably also consider value, customer service, ease of use, and investment choice.
The main charges you will encounter are admin fees (an annual charge to run the SIPP), dealing charges (for buying and selling investments, some providers cap them over a certain time period), and fund manager charges (what the underlying fund manager charges to run their fund). There might also be other fees and charges such as exit fees, so read the terms and conditions of your fund platform.
We did some research to find the cheapest and best DIY pensions on the market. You can read our report here. AJ Bell YouInvest and Vanguard came out as the cheapest for most people – AJ Bell levies an annual charge of 0.25% if you’ve got less than £250,000 to invest, and charges £1.50 to trade funds, and £9.95 per deal to trade shares, up to nine deals a month. With Vanguard, you can only invest in its own funds, but it’s cheap with an annual charge of 0.15% a year, capped at £375, and no admin charges.
Are SIPPs safe?
As long as your SIPP is held with an FCA-regulated provider and qualify as ‘contracts of long-term insurance’ (check your provider’s small print), it will be covered by the Financial Services Compensation Scheme. This means any cash in your SIPP will be covered by up to £85,000 per provider. The regulated investments within your SIPP are treated separately and have their own FSCS protection, so if the manager of a fund you hold collapses, you could claim compensation of up to £85,000 because most funds will be regulated. Individual shares won’t be covered, however, and you can’t claim just because your investments haven’t performed well and you’ve lost money.
If you suffer a loss as a result of poor advice from a UK-regulated financial adviser relating to a SIPP, you may be able to claim FSCS compensation, but usually you’ll need to start by making a complaint to the Financial Ombudsman Service if your adviser is still trading.
Advantages and disadvantages of a SIPP
The main pros and cons are as follows:
- You have control over your own portfolio.
- You can access a wider range of investments than you might get in a workplace or other type of personal pension.
- You get tax relief on your contributions.
- You don’t pay tax on dividend income your investments generate, or capital gains tax on your investment growth.
- SIPPs are cheap and easy to open and manage online.
- You have the option to choose a SIPP that is professionally managed for you.
- You have the flexibility to use a SIPP alone or alongside other pensions to save for your retirement.
- You can start saving small amounts.
- You have various options when it comes to taking money out of your SIPP.
- You are responsible for your portfolio and might not always know what to do for the best without professional advice.
- You might not want to research investments or do the legwork of making investment decisions.
- You pay income tax on money you withdraw.
- You’ll pay various fees and charges to your SIPP provider and the managers of your underlying funds.
- You can’t access the money in a SIPP until age 55.
- With any investment comes risk, and you could end up with less money than you put in.
Best SIPP providers
It’s impossible to say which provider is the ‘best’ because we all have different needs and what works brilliantly for one person might not work for another. However, some providers stand out as very popular among those looking to open a SIPP. For functionality and investment choice, Hargreaves Lansdown comes out on top, while Nutmeg offers a strong managed pension option for novice investors, and AJ Bell YouInvest performs well on cost. Have a look at our SIPP best buy tables here where we summarise what each provider offers and rate their average costs as low, average or high. In our review of the best and cheapest SIPPs you can read more detailed summaries of a range of different providers, their pros and cons, and charges depending on the size of your portfolio.
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