A self-invested personal pension (SIPP) is a special kind of personal pension. It lets you choose the investments that make up the fund, which makes it the most flexible kind, and an attractive option for those who like to take a more active role in investment.
If you are considering setting up a personal pension for yourself or a dependant, this introduction will help you decide if a SIPP may be a suitable option and also tell you how to set one up.
Pension saving into a SIPP
On the one hand, a SIPP lets you take more control over your retirement saving. Looked at another way, a SIPP allows you to apply the tax benefits of a pension to an investment portfolio that you choose yourself.
Opening a standard personal pension (such as a stakeholder pension) is relatively simple – your involvement is generally limited to making monthly contributions, and all the investments are managed for you. A SIPP requires that you take a more hands-on role. This DIY aspect generally makes them cheaper, but you shouldn’t base your decision on cost alone. Plenty of high earners opt for SIPPs as a way to be more involved and for the chance of greater returns.
The advantages of a SIPP
Setting up a SIPP can be a good way to combine several existing pension pots into one. This means you are no longer trying to keep track of lots of plans from previous employers, and can monitor how close you are to the lifetime allowance.
A SIPP also gives you more freedom to manage your pension fund to meet your changing needs. You can flex the amount you pay into your SIPP, so that (for instance) you can take payment holidays when necessary and contribute large one-off sums at other times.
Also you are not bound by your scheme’s limited choice of funds, so you have greater control over the level of risk you are exposed to and the growth potential of your investments. Management fees may also be lower.
The downsides of a SIPP
As you have more control over your SIPP, you may have no-one else to blame if things go wrong. Taking investment decisions without adequate advice may lead to big losses, so it is crucial to know what you are doing.
You may also find that a SIPP takes up more of your time than you expected. You can solve this problem by engaging a financial adviser to help you. They can administer the SIPP on your behalf and also help you choose the best investments for your growth plans and risk profile.
What are the pension rules on SIPPS?
To open or pay into a SIPP, you must be under the age of 75. You can also open a SIPP for a dependent, including someone under 18 (this is known as a Junior SIPP and has its own special rules). You can also make payments into someone else’s SIPP (e.g. your spouse’s or parent’s) but they must set up the SIPP themselves.
Otherwise, the rules on SIPPS are the same as those for pensions in general. You benefit from the same tax relief and tax-free growth, the same annual and lifetime allowances, and can access your pot in all the usual ways from the age of 55.
Find out more about how pensions work.
Do I get tax relief on a SIPP?
As with any defined contribution pension, when you pay into a SIPP you receive tax relief at your highest rate of tax (so basic rate taxpayers get 20 per cent, higher-rate taxpayers can claim 40 per cent, and so on).
Given that SIPPs are also essentially an investment portfolio that you control, you can view your SIPP as the most tax-efficient way to invest in a wide range of different assets. Find out more about pension tax relief.
How do I set up a SIPP?
You can approach a SIPP provider directly and they will steer you through the process. However, a more prudent approach is to go through your financial adviser. An IFA can help you choose the best provider for your needs and work with you to create an investment strategy and portfolio.
How to set up a SIPP:
- Identify all your current pensions, and decide which ones you want to move into the SIPP (some may be best left where they are).
- Decide how much risk you can take. The rule of thumb is that you can take more risk the younger you are, and the more you earn. Higher risk typically means higher rewards over time, but more likelihood of short-term losses. Remember that taking very low risk is a risk in itself – because your investments may not grow enough.
- Identify where and how you want to invest your funds.
- Decide who will manage the SIPP. You can do this yourself, or ask your financial adviser to provide a ‘discretionary management service’ where they make the day-to-day investment decisions for you, based on your stated aims.
What investments can I put into my SIPP?
A SIPP lets you explore a much broader range of investment options than a standard personal pension. Within the tax-protected pension wrapper you can keep assets such as:
- Individual stocks and shares
- Government securities
- Unit trusts
- Investment trusts
- Insurance company funds
- Traded endowment policies
- Deposit accounts with banks and building societies
- Some NS&I products
- Commercial property
Can I invest in property through my SIPP?
You can invest in commercial property through your SIPP. You can buy the property through your pension and the pot will benefit from any increase in the property’s value, and will also receive any rent paid on it.
This is particularly useful if you run a business and need business premises. You can buy your own premises through your SIPP, and then pay rent on it – the rent goes into your pension pot, so you ultimately benefit from it. Provided that the rent charged is a fair market rate, this can be a very efficient solution for business owners.
You can’t directly buy residential property with your SIPP, but some SIPPs let you include residential property through certain collective investments, such as real estate investment trusts (REITs).
Learn more: SIPP vs ISA: which should you choose?
What charges will I pay with a SIPP?
You will need to pay certain charges to the SIPP provider. However, all pension funds involve management fees, and generally SIPPs (being largely self-administered) charge lower fees than other types of pension.
SIPP charges are likely to include:
- Platform fee
Your SIPP provider may charge you a fee for using their product, i.e. their ‘platform’ to host your investments. This might be a flat annual fee, or a percentage of your investment. Also called the ‘annual administration charge’, it may be up a few hundred pounds a year, but could be much less. Some providers don’t charge a platform fee.
- Holding charges
Some providers charge a fee for holding funds on your behalf. Again this may be a flat fee or a percentage of assets, and in reality is just an alternative to charging a platform fee (providers will generally charge one or the other).
- Dealing fees
There are usually fees to pay when you buy and sell shares within the fund (roughly £10 per transaction, usually). If you plan to do a lot of trading, this can bump up your costs.
In addition to the above there may be exit fees if you want to transfer your SIPP to another provider. Fees can also vary depending on the type of SIPP you use (see below).
The different types of SIPPS
There are two main types of SIPP available: full SIPPs and low-cost SIPPS.
A full SIPP offers a wider range of investments and generally comes with a certain level of investment support, helping you make decisions and administer certain transactions. As such, a full SIPP charges higher fees, and so it is generally more suitable for those with larger pension funds.
A low-cost SIPP, on the other hand, can be started with as little as £5,000 (though more is usually recommended). You won’t get the same level of investment support and will generally be expected to manage your fund yourself (probably with the help of your financial adviser). Some low-cost SIPPs do however offer ready-made portfolios if you don’t want to be fully hands-on.
How safe is a SIPP?
As with any kind of investment on the stock market, the value of the assets held in your SIPP can fall as well as rise. However, over the long investment period, positive growth is the most likely outcome in the vast majority of cases.
In the event of your SIPP provider company collapsing, you still have a number of protections. Your provider only manages your assets and does not hold them, so these should still be safe. If any of the banks or fund managers that do hold your assets go bust, then the Financial Services Compensation Scheme will repay your losses up to a maximum of £85,000.
Any cash held within the SIPP is also covered separately, again up to £85,000.
In short, a SIPP is no more or less risky than any defined contribution pension scheme.
What happens to my SIPP when I die?
A SIPP is treated like any other pension pot if you should die with any of the pot unspent. Your chosen beneficiary can inherit the remaining pot. Find out more about what happens to pension pots when you die.
Should I transfer my final salary pension to a SIPP?
If you have a final salary (i.e. defined benefit) workplace pension from any of your jobs, you may have the option to transfer it to a SIPP if you wish. This essentially means trading a guaranteed income for life for a finite sum of money in the form of a pension pot. Sometimes this may be the right choice for you – often, it won’t be. Consult a financial adviser first, and find out more about pension transfers.