Self-invested personal pensions (SIPPs) can be useful if you’re saving for retirement.
We look at how SIPP contributions work, the annual limits and more.
What is a SIPP?
A self-invested personal pension (SIPP) is similar to a traditional personal pension.
Any UK resident (or person working overseas with UK earnings) under 75 can set up and pay into a SIPP.
Payments can be regularly scheduled or one-off, depending on your preferences.
However, a SIPP is distinct as it allows you to choose your investments from a range of options, including company shares, property and land, investment trusts and collective investments.
You can choose these or work with an independent financial adviser to select the right investments for your SIPP.
A SIPP offers savers a way to grow their wealth and benefit from decent returns over an extended period, but there are some important considerations and rules to be aware of.
Why use a SIPP?
The most significant difference between a SIPP and traditional pension is the increased flexibility and control over your investments.
With a SIPP, you can benefit from:
Tax-free contributions that can grow without income tax, dividend tax and capital gains tax.
Government tax relief of 20%, with higher-rate taxpayers able to claim another 20% and additional-rate taxpayers able to claim an extra 25% via self-assessment.
Tax-free withdrawals of up to 25% of your SIPP when you’re over the age of 55 (although the normal minimum pension age is rising to 57 from 6 April 2028)
You’ll have to pay fees associated with your SIPP and should budget accordingly. For instance, the cost of hiring a financial adviser to manage your investments or for fees to buy and sell shares.
How do SIPP contributions work?
You can put 100% of your income into a SIPP each tax year up to the maximum of £60,000, which includes personal contributions, employer contributions and tax relief.
Anything above this amount will not be eligible for tax relief.
If you aren’t working, you can contribute up to £3,600 a year, equating to £2,880 from you and £720 in tax relief.
If you are working, and your employer wants to contribute to your SIPP, they can, either by cheque, direct debit or BACS.
There’s no limit to the amount an employer can contribute besides the £60,000 cap for tax relief.
Employer contributions are usually made pre-tax through a method such as salary sacrifice, allowing you to benefit from tax relief.
If your employer offers after-tax contributions, basic rates of tax relief will apply, and you will need to claim the remainder via a self-assessment tax return if you’re not a basic rate taxpayer.
Anyone who wants to can contribute to your SIPP, but non-employer contributions will be treated as if you made it yourself, so it’s subject to the same tax conditions and rules.
How much can I pay into a SIPP?
There is no minimum SIPP contribution, while the maximum contribution allowance is £60,000. If you pay more than £60,000 into your SIPP within a financial year, you’ll face a tax charge.
There’s also a tapered annual allowance, first introduced in April 2016, which applies to exceptionally high earners.
If your income is over £200,000 annually, for every £2 of adjusted income over £260,000, your pension allowance will be reduced by £1.
The biggest reduction in the annual allowance is £50,000, so your annual allowance could be cut to £10,000 if you earn £360,000 or more.
Can you carry forward any SIPP allowance?
You can carry forward your SIPP allowance, so you can contribute more than the annual pension allowance without any tax charges.
It’s available to those who have used up their allowance for the current year but have unused allowance in any of the last three tax years.
Before carrying unused allowance forward, it’s worth talking to a financial adviser.
Different rules may apply depending on whether you’ve started drawing income from your SIPP.
Does taking an income from your SIPP lower your annual allowance?
Once you start taking an income from your SIPP, you’ll usually trigger the money purchase annual allowance (MPAA).
When the MPAA is activated, the amount you can put back into the pension pot each year will drop to £10,000. In other words, £8,000 from your contributions and £2,000 in tax relief.
You may be able to work around the MPAA if you take out a lump sum comprising less than 25% of your SIPP, but it’s worth getting financial advice beforehand.
Unbiased can connect you with an expert financial adviser to help you plan your retirement and the best ways to access your pension pots.