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Self-invested personal pensions (SIPPs) are private pensions where you manage the investments yourself. To draw an analogy, if a standard personal pension is equivalent to paying someone to build your flatpack furniture for you, a SIPP is the equivalent of building it yourself. To make this option work well, it helps to have experience and knowledge of investing and to be prepared to do some research. Some people opt for a SIPP because they want more control and because they’re hoping to achieve higher gains by the time it comes to retiring.
What is a self-invested personal pension?
A SIPP, or self-invested personal pension, is a type of private pension (as opposed to a workplace pension that is opened via your employer). SIPPs are defined-contribution (DC) pension schemes and, as with all DC pensions, the money you pay in is invested. The idea is that your investments will grow over your lifetime, giving you a decent pot to draw on when you retire. However, because the performance of investments can be variable, there’s no certainty over exactly how much you’ll end up with.
When you put money into your SIPP, you will benefit from the same tax advantages of any regulated pension product. Specifically, you’ll benefit from tax relief on the money you pay in.
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What’s the difference between a SIPP and a personal pension?
SIPPs are a subset of personal pensions. There are a few key differences between SIPPs and standard personal pensions.
The pension provider manages your investments on your behalf. You can usually choose the broad investment strategy they use (for example, investing in ethical funds, or using a strategy that reduces your risk-level as you approach retirement), but you won’t have granular control.
- Suitable for those with less experience in investing.
- Choose a fund or selection of funds that broadly match the investment strategy you are looking for. Some personal pensions give you more freedom to choose, which blurs the lines a little.
- The specifics of your investments are managed by the fund’s investment experts.
- Charges tend to be lower than for SIPPs.
Management of your pension investments is down to you. This gives you much more control, but also means you take on more responsibility for your scheme’s performance.
- Might be suitable for you if you’re more experienced in investing and know how to make investment decisions.
- Choose your own investments; you can typically choose from a much wider and more sophisticated range of investments than with other personal pensions.
- You manage your investments yourself or hire an investment adviser to do it for you.
- Typically higher charges than standard personal pensions.
Who should consider a SIPP?
SIPPs tend to carry more risk than private pensions. So, if you’re not open to riskier investments and think that worrying about the value of your investments might keep you up at night, a SIPP may not be for you. If you think you’d like to be exposed to more risk with the potential to gain more on your investments (along with the risk of greater losses), then a SIPP could be suited to you.
In general, SIPPs tend to be better for more experienced investors that make larger contributions and/or have a larger pot.
Most SIPPs are managed using digital investment platforms, so you’ll also need to have a decent level of tech know-how and be comfortable managing investments online. If not, check with the provider whether it offers phone or postal services (these may cost more).
What are the advantages of saving into a self-invested personal pension?
SIPPs share many of the same advantages as saving into any personal pension, including:
- They provide a vessel for those without a workplace pension, or those who want to save more than they can in a workplace pension, to save for retirement.
- Contributions into a SIPP qualify for tax relief. You’ll usually receive basic-rate (20%) income tax relief at source (meaning that the tax you would have paid on each contribution is added to your pension pot). If you are a higher-rate (40% or 45%) taxpayer, you can claim the extra via your tax return or by applying directly for a tax refund.
On top of these general advantages, the main advantage SIPPs have over regular personal pensions is greater flexibility on the investments you can choose.
What should I look out for when choosing a SIPP?
If you’ve weighed up your options and are certain that you want a SIPP, rather than another kind of personal pension, there are a few things to think about. These include:
- The type of SIPP you want; low-cost, full or robo-advisor (we explain the differences between each type below).
- The charges for opening and managing the scheme and moving your money around.
- Any restrictions on the minimum or maximum amount you can pay in and how often.
- Whether you have the ability to pause and restart payments into the scheme, without penalty.
- The range of investment options available to suit your preferences and appetite for risk.
- The guidance and support that the provider offers to help plan for your retirement and keep an eye on your investment options, such as online tools or a helpline.
- How you’ll receive updates about your investments.
- Whether you can manage your investments by phone or post, as well as online.
If you’re not sure where to start, you may want to seek independent financial advice. There will be a charge for this, but it will save you time and effort and help make sure you select the right scheme for your specific circumstances.
What are the different types of SIPP?
There are 3 broad categories of SIPP, though the boundaries can sometimes blur.
Low-cost DIY SIPPS
While all SIPPs are DIY to a certain extent, in that you are in control of your own investments, SIPPs with the lowest charges tend to leave you completely to your own devices. While some may offer online tools or apps to make management easier, you typically won’t get any investment guidance or advice directly from staff of the SIPP company. The range of investment types available will tend to be fairly straightforward and mainstream; you may not be able to invest in commercial property or offshore funds, for example.
Pros of low-cost SIPPs:
- The clue is in the name – they’re likely to be your cheapest SIPP option.
- You have full control over the management of your investments.
Cons of low-cost SIPPs:
- Execution-only (so no support or advice on what to invest in).
- Smaller range of investments than full SIPPs.
- Require fairly high time commitment to stay on top of things.
With these platforms you’re asked a series of questions about your goals, appetite for risk and investment preferences, and a “robo-advisor” (essentially a clever, automated algorithm) will allocate you a suitable portfolio of investments and manage them on your behalf. They can be a good half-way house between a standard personal pension, where you have very little control over where your money is invested, and a fully DIY SIPP. They do tend to be more expensive than low-cost DIY SIPPs though. And, despite the name, they’re not a substitute for full, personalised financial advice.
Pros of robo-advisor SIPPs:
- Offer limited (automated) support to help you make investment choices.
- May be a good half-way house between a fully DIY SIPP and a standard personal pension.
- Less expensive than full SIPPs.
Cons of robo-advisor SIPPs:
- Typically more expensive than fully DIY SIPPs.
- “Robo-advice” is not a replacement for tailored advice from a regulated financial adviser.
These offer the widest choice of investments, often including commercial property and off-shore funds. They’re typically more expensive than other options though, so are usually best for people with large pots and who want access to less-mainstream, more sophisticated investments. Part of the reason for the higher costs is that you usually have access to a team that can help you make investment decisions and may be able to help with the administration of more complex investments.
Pros of full SIPPs:
- Backed by support and advice from staff at provider.
- Wider range of investments than other types of SIPPs.
Cons of full SIPPs:
- Investments more complex than most people are likely to need.
- Usually not right for those with small pots.
Which providers offer SIPPs?
You can buy low-cost DIY SIPPs with most online investment platforms, including those offered by mainstream banks. Examples of providers include AJ Bell Youinvest, Aviva, Barclays, Fidelity, Halifax, Hargreaves Lansdown, and Interactive Investor.
Robo-advisor SIPPs are offered by the likes of Evestor, Nutmeg and Wealthify.
If you’re looking for a full SIPP, backed by support and advice by the firm, providers include Embark Pensions, Rowanmoor and Suffolk Life.
If you’re considering a SIPP, it’s well worth shopping around as charges can vary considerably between providers. The cheapest SIPP for you is likely to depend on your specific circumstances, such as the size of your pot and how often you plan to make trades. If in doubt about the type of SIPP you need, or which provider to choose, consider getting regulated financial advice.
How can I open a self-invested personal pension?
To open a SIPP, you can either choose a provider and set your pension up yourself (taking into account the things to look for in a personal pension that we’ve outlined above), or ask a regulated financial adviser to recommend a provider for you. This will come at extra cost, but reduces the time you need to spend researching and comparing and can help ensure you make the right choice.
Plus, if the product a financial adviser recommends turns out to be unsuitable, you’ll be able to complain (initially to the adviser or, if that fails, to the Financial Ombudsman Service). If you choose and open a SIPP yourself, and it turns out to be a poor choice, you’ve got limited options for recourse. Many financial advisers are also able to help you manage the investments in a SIPP on an ongoing basis.
How much do SIPPs cost?
You’ll pay for your SIPP via a range of fees and charges. These are typically (though not always) deducted from your pot rather than you paying fees on top of your contributions. Because the size of your pot will be changing constantly as your investments rise and fall in value, this can make it hard to fully grasp the impact of fees.
But, in practice, high fees can cost you dear and make a big difference to how much you have in your pot when you come to retire, so it’s worth trying to compare their likely impact on your pension before you take out a SIPP. Different platforms apply different types of charge.
Annual management charges
At a minimum, you’ll need to pay an annual management charge, which may be levied as either of the following (or both):
- A fixed annual administration fee, typically a few hundred pounds.
- An annual platform fee, charged as a percentage of the amount you’ve invested (typically between 0.25% and 0.75%, though this can be higher).
Whether a fixed or a percentage fee is better for you will likely depend on the size of your pot (percentage fees might be better for those with smaller pots, and vice versa).
Bear in mind too that some providers charge tiered platform fees, depending on how much you have invested. For example, you might pay 0.5% on the value of your pot up to £100,000, and 0.25% on amounts above this.
Other fees to look out for, depending on the specific provider and what you want to do with your investments, include:
- Set-up charges.
- Fund charges if you invest in funds, to cover the management costs; the percentage charge will vary according to the specific fund.
- Trading fees that apply each time you buy or sell investments (these may be fixed or a percentage).
- Transfer-out fees; you may incur these if you move your pot to another scheme.
- Withdrawal fees, which sometimes apply when you start taking money out of your pot.
How much can you save into a SIPP?
There is technically no limit on how much you can pay into a SIPP. However, there is a limit on how much across all of your pension pots qualifies for tax relief. These limits exclude the state pension, but include all workplace and personal pensions. There are maximum annual and lifetime allowances. As of the 2021-22 tax year:
- You can benefit from at-source tax relief on up to £40,000 of contributions per year across all of your pension pots, or 100% of your annual salary if this is less.
- There is a total lifetime allowance of £1,073,100 on the value of your pension when you come to access it. The lifetime allowance is the maximum your pension can be worth without triggering an extra tax charge when you come to access your pension.
Does saving into a SIPP affect my pension lifetime allowance?
Yes. All money held in workplace or personal pensions, including SIPPs, will count towards your pension lifetime allowance. This is the total value of all of your pension pots (excluding the state pension) when you take benefits from them.
As of 2021-22, the lifetime allowance is £1,073,100. It will be frozen at this level until the 2025-26 tax year.
When you start accessing your pension or transfer it overseas (or at age 75, if this is earlier) the total value of your pension benefits will be checked. Anything that exceeds the maximum lifetime allowance will incur a tax charge.
Where is the money in a SIPP held?
The money in a SIPP is held in a range of investments that you select.
What investments can I hold in my SIPP?
Most mainstream investment products can be kept in a SIPP, including:
- Open-ended funds
- Investment trusts
- Unit trusts
- Exchange traded funds
- Gilts (government bonds)
- Corporate bonds
- Individual shares
It’s sometimes possible to invest in commercial property and land too, though you can’t use a SIPP to invest directly in residential property.
You can also hold cash in a SIPP, although you won’t be paid interest on this at the same rate you would get with a traditional cash savings account.
Some people increase their cash holding in their SIPP as a way to reduce risk as they approach retirement. Again, they won’t get as much in interest as they would have with a savings product. However, this might not be a big problem, as the cash still would have been subject to the tax top-up when they paid it in. In other words, by this time, the money may have already done the work it was meant to do.
Can I have both a SIPP and a workplace pension?
Yes, it’s fine to pay into both a personal pension and workplace pension simultaneously. In fact, you can have as many workplace pensions as you have jobs, and as many personal pensions as you want. We wouldn’t recommend opening too many though, as it can make it hard to keep track.
If you do have a workplace pension (or more than one), it’s usually better to pay into this as a priority, as you’re likely to also benefit from employer contributions.
Even if you want to make extra contributions to a pension above and beyond those set by your employer, it could be cheaper to add to your workplace pension than to set up a SIPP. That’s because, even if your employer is unlikely to increase its own contributions, you may benefit from lower costs than investing via a SIPP. This isn’t a sure thing though, so compare costs and charges to be certain.
When can I access the money held in a SIPP?
Like most other personal or workplace pensions, the money held in a SIPP can usually be accessed from age 55 (and not before, without incurring penalties). This is due to rise to age 57 in 2028.
What happens to my self-invested personal pension when I retire?
By default, absolutely nothing. Regardless of when you consider yourself officially “retired”, unless you take action to access it, the money in your SIPP will stay invested and (hopefully) carry on growing in value.
If you want to make use of the money in your pension, you have a few options for how you receive it.
How do you withdraw money from a self-invested personal pension?
SIPP withdrawals are the same as for any defined contribution pension. You can choose to take out 25% of it tax-free (subject to not having exceeded the pension lifetime allowance).
Beyond this, you have a few options; beyond that initial tax-free 25%, any other withdrawals are liable for income tax.
- Buy a guaranteed income for a fixed term or for life, known as an annuity.
- Leave most of your money invested, using it to draw a regular income – known as pension drawdown.
- Take the whole lot out in one go. This is typically only likely to be a good option if your SIPP pot is relatively small and you have other ways to fund your retirement, not least because you’ll be taxed on the amount that exceeds 25%.
- Take a number of smaller lump sums; in this case, rather than getting 25% of the full amount tax-free at the outset, you’ll usually receive the first 25% of each lump sum withdrawal tax-free.
- Mix and match some or all of the approaches above.
What happens to the money in my SIPP if I die before withdrawing it?
If you die before getting the chance to withdraw all or some of your pension then it can be inherited by your beneficiaries. They may need to pay tax on the SIPP, depending on how old you are when you die.
If you die under the age of 75:
Those inheriting the pension will get it all tax free.
If you die over the age of 75:
Your beneficiaries can withdraw the full amount at once, take it as a regular income, or take lump sums whenever they like. In all of these cases, it’s subject to income tax.
Pros and cons of a SIPP
- Flexibility over when and how much you put into your pension, and where the money is invested.
- Like all workplace or personal pensions, you’ll benefit from tax relief on the money you pay in.
- Investment support or advice available via robo-advisor or full SIPPs.
- Typically cost more than standard personal pensions.
- The risks may be higher than pensions that are managed by the pension provider.
- If you pick a provider or invest without regulated financial advice, you won’t be able to complain if you make unsuitable choices.
If you don’t have a workplace pension, or want to contribute more towards your pension than your employer’s scheme allows, a SIPP could be worth considering. Unlike standard personal pensions, SIPPs let you manage your investments yourself, so are usually best for experienced investors that want more granular control over where their money is held. But they can cost more, and come with higher risks. If you’re not sure what’s best for you, or want some help choosing a SIPP provider or specific investments, consider using a regulated financial adviser.
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