How to transfer your pension to a SIPP

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.  

We reveal how to transfer your pension to a self-invested personal pension (SIPP) and the benefits and risks of changing pension schemes.

What is a SIPP?

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

It’s a tax-efficient savings plan you contribute to throughout your working life to build 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. 

SIPPs are particularly beneficial for experienced investors or those with significant pension funds, as they allow for a more hands-on approach to managing their retirement savings.

It’s also worth noting there are different types of SIPPs available.

For example, a full SIPP offers the widest range of investment options, while a low-cost SIPP may have fewer investment choices but has lower fees.

There’s also the hybrid SIPP, often offered by insurance companies. With this type of SIPP, you may be expected to pay in a lump sum before choosing your investments.

Understanding the differences can help you choose the most suitable SIPP.

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.

This is similar to the risk involved in an SIPP, although you’re in charge of the assets you invest in.

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. 

If your defined benefit pension is worth more than £30,000, you are legally required to seek regulated financial advice before transferring.

This is to ensure you fully understand the risks, especially the loss of a guaranteed income for life.

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 

Like other pensions, the government adds basic-rate tax relief to your contributions, with the amount depending on your 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.

Inheritance planning 

Although a SIPP can currently be passed onto your beneficiaries free from inheritance tax (IHT), the rules are changing in April 2027.

The new rules mean that your loved ones may have to pay up to 40% tax on the value of an inherited SIPP, depending on the value of the rest of your estate and any available exemptions.

In addition, if you die after age 75, your beneficiaries must pay income tax on any income they withdraw from your pension at their own marginal rate.

If you die after age 75, your beneficiaries can withdraw income without owing income tax up to a threshold of £1,073,100.

Junior SIPPs

You can also open a junior SIPP for under-18s, with a contribution allowance of £3,600 for the 2024/25 tax year (you can contribute up to £2,880 a year as the government adds tax relief, pushing this up to £3,600).

Contributions to a junior SIPP are eligible for tax relief in the same way as adult SIPPs, providing a valuable opportunity to start saving for retirement early.

Flexibility 

SIPPs also offer flexibility when drawing an income in retirement, including the ability to take a tax-free lump sum and manage how the remaining funds are invested or withdrawn.

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. It’s a good idea to balance your investments over various funds to minimise 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 expensive, so read all of the small print to ensure you know what you’re paying.

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% 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’ll be in the driving seat with a SIPP, so it’s important to learn the benefits and 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.  

Get expert financial advice

Transferring your pension to a SIPP can offer significant benefits, including greater control over your investments and potential tax advantages.

However, it's crucial to carefully weigh these benefits against the risks and costs involved.

By following our guide, you can navigate the transfer process with greater confidence and ensure your new SIPP aligns with your long-term retirement goals.

Take the time to research, seek advice, and make informed decisions to secure a more tailored and potentially rewarding pension plan for your future.

Let Unbiased match you with a financial adviser for expert financial advice to ensure you make well-informed decisions throughout your pension transfer process and maximise the benefits of your new SIPP.