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How to transfer your pension to a SIPP

6 mins read
by Unbiased Team
Last updated Monday, December 11, 2023

What to consider when transferring your personal pension to a SIPP. Discover the benefits, as well as the financial implications and potential pitfalls.

For many people, your pension will provide a large proportion of income upon retirement.

Getting the right pension scheme in place for your personal situation will give peace of mind that your investments will provide the greatest future return.  

Read our guide on how to transfer your pension to a SIPP to discover the benefits and risks involved in changing pension scheme.

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What is a SIPP?

A Self-Invested Personal Pension (SIPP) is a type of personal pension scheme.

Like any personal pension it’s a tax-efficient retirement savings plan that you contribute to throughout your working life, to build up a pension fund. 

What sets a SIPP apart from other types of personal pensions is the level of control it offers you.

With a SIPP, you will generally have a wider range of investment options compared to a traditional pension scheme.

Investment options include stocks, bonds, mutual funds, and even commercial property. 

What types of pensions can be transferred to a SIPP? 

The two core personal pension schemes in the UK are defined contribution schemes and defined benefit schemes. 

Defined contribution schemes can be paid into by an employer or you as a private pension.

A specific amount is paid in on a regular basis, and the money is then put into investments.

This means that the value of your pension can fluctuate with market conditions.

As this is similar to the risk involved in a SIPP, the relative change in risk is lower when transferring to a SIPP. 

A defined benefit scheme is usually a workplace scheme arranged by an employer.

This promises to pay out a set amount upon retirement, and how much you receive will depend on the workplace pension rules, rather than market conditions.

Because of the security offered by these pensions, it is generally considered much higher risk to transfer funds from a defined benefit scheme into a SIPP. 

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What are the benefits of a SIPP? 

Transferring to a SIPP can have many benefits (as well as risks).  

Consolidation 

If you have a number of different pension pots spread out over different investment areas, a SIPP can bring these together into a single pension scheme. 

Greater control 

With a SIPP you can choose from a wide variety of investment options and you can direct funds into those that you feel will offer the best return. 

Tax advantages 

The government adds basic-rate tax relief to your contributions, with the amount depending on your personal situation.

This is added automatically, effectively increasing your pension pot. If you are a higher or additional rate taxpayer, you can claim additional tax relief through your annual tax return.

In addition to this, any income and capital gains generated within a SIPP are tax-free! 

In the event of your death before the age of 75, a SIPP can be passed onto your beneficiaries tax-free.

Even if it happens after 75, they will only pay income tax on the funds at their own personal income tax rate. 

You can also open a Junior SIPP for under-18s. 

What are the risks of a SIPP? 

Like any investment offering a higher potential return than ‘the safe option’, it’s important to be aware of the risks involved

  • Investment funds can go down as well as up, so make sure you minimise exposure to market downturns. 

  • Don’t put all your eggs in one basket (otherwise known as ‘concentration risk’). Particularly if you are new to investing, it’s a good idea to balance your investments over a variety of different funds to minimise your exposure to market fluctuations. 

  • Loss of benefits. Ensure you research the benefits of your current plan so that you can weigh up the loss of these versus the gain of the SIPP.  

  • Hidden fees and charges can be an expensive mistake to make, so read all of the small print to ensure you’re not hit with an expensive bill for leaving a scheme. 

How to transfer a pension to a SIPP? 

Ultimately, transferring your pension scheme to a SIPP can be as simple as filling out the form for the new scheme.

The new provider should do most of the work for you in terms of transferring your pension pot.

It can take anywhere from a few weeks to a few months to finalise a SIPP transfer, depending on your provider. 

To transfer your pension to a SIPP as prudently as possible, we’ve put together a seven-step guide to assist you: 

1. Understand your current pension scheme 

Familiarise yourself with the details of your existing pension scheme, including its terms, benefits, and any potential charges associated with transferring.

For example, most pensions these days allow for a maximum 25 per cent lump-sum withdrawal; however, some pre-2006 schemes allowed for a higher percentage.

Additionally, your existing scheme may well charge you a fee for moving schemes.

Some SIPP providers offer to cover some or all of this cost – a good financial adviser will be aware of schemes that offer this. 

2. Do your research 

You’re going to be in the driving seat with a SIPP, so it’s important to learn the benefits it offers as well as the potential negative impacts of switching.

You will have more control over your pension investments with a SIPP, as well as a wider range of investment options compared to traditional pension schemes. 

3. Seek professional advice 

Consider consulting a financial adviser who specialises in pensions and retirement planning.

They can help assess your current pension scheme, evaluate whether transferring to a SIPP is suitable for your circumstances, and guide you through the process. 

4. Choose a SIPP provider 

Research different SIPP providers and compare their fees, investment options, customer service, and reputation.

Ensure that the SIPP provider you select is authorised and regulated by the Financial Conduct Authority (FCA). 

5. Apply for a SIPP 

Contact your chosen SIPP provider and inform them of your intention to transfer your pension.

They will provide you with the necessary application forms and guide you through the process.

You may be required to provide details about your existing pension scheme, so have this information at the ready. 

6. Obtain transfer value and information 

Request a transfer value statement from your current pension provider.

This statement outlines the value of your pension and any applicable charges or penalties.

Your SIPP provider may require this information to process the transfer. 

7. Review investment options 

Once your pension transfer is complete, review the investment options available within your SIPP.

Decide how you want to allocate your pension funds across different investment assets, such as stocks, bonds, mutual funds, and other options offered by your SIPP provider.  

Assessing the benefits, risks, and costs associated with the transfer is essential, and professional advice from a financial adviser is highly recommended to make informed decisions.  

Unbiased can help match you with the perfect adviser for you – find yours now.

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Author
Unbiased Team
Our team of writers, who have decades of experience writing about personal finance, including investing, retirement and pensions, are here to help you find out what you must know about life’s biggest financial decisions.