Updated: May 07, 2019
The key information you need to know about SIPPs and where to turn for the right advice on them.
Author: Tony Stevens - Finance Expert
Updated: May 07, 2019
If you’re looking for a retirement savings scheme have you ever considered a self invested personal pension?
We get lots of enquiries from people who want to understand how a SIPP works and how this type of pension differs from other UK retirement schemes.
To answer all of these questions we’ve put together this comprehensive SIPP guide where we will cover:
The following topics are covered below...
What is a SIPP?
The term SIPP stands for Self Invested Personal Pension. As the name suggests, with a SIPP pension plan, a member has much more autonomy and control over the range of asset classes where they can invest their money.
A SIPP is a form of personal pension which offers a greater degree of investment choice than would be available from a traditional pension provider. A SIPP acts as a wrapper that can hold a wider variety of different types of asset class.
As members are allowed much greater freedom to dictate how their pensions are invested, SIPPs are often referred to as ‘DIY pensions’.
We can arrange a free pension review for you today
How does a SIPP work?
SIPPs were traditionally designed for anyone looking to manage their own retirement savings and who would feel comfortable regularly reviewing their own investment portfolio.
Most self invested personal pension funds in the UK offer the following asset classes to invest in:
- Unit Trusts
- Open Ended Investment Companies (OEICs)
- UK stocks and shares
- International shares
- Investment Trusts
- Commercial Property
- Exchange Traded Funds (ETFs)
- Unlisted shares
- Gilts and bonds
- Certain UK national savings
The range of investments will vary depending upon the SIPP provider; some will be more extensive than others. As a general rule investment in direct residential property is not allowed, however, certain collective investment funds may hold residential property as part of their wider portfolio.
SIPPs are available to anyone in the UK under the age of 75. You can begin to drawdown your SIPP funds once you reach 55 years of age.
How many types are there?
There are four types of SIPP pension available in the UK:
- Full SIPP
- Lite SIPP
- Deferred SIPP
- Hybrid SIPP
What is a full SIPP?
Also known as a ‘pure’ SIPP, these models offer the full range of investment choices, including commercial property and single share trading. Investment advice is also usually available via the SIPP provider. Full SIPPs are typically associated with the highest fees.
What is a Lite SIPP?
Often referred to as a single investment SIPP, as they only invest in one type of asset class. Lite SIPPs can usually be transferred into full self invested pensions at some stage in the future should that be desirable.
What is a deferred SIPP?
A deferred SIPP begins its life as a personal pension but is written under a SIPP trust, therefore, it can offer access to a wider range of investments (not as many as a full SIPP) but without some of the higher charges usually associated.
They are designed for anyone who may want to have access to all the benefits and investment freedom of a full SIPP at some point in the future.
What is a Hybrid SIPP?
Very similar to a deferred SIPP, this model offers a mixture of funds available through a SIPP and personal pension investment fund.
If you’d like to know more about the different types of SIPP models, get in touch and we can arrange for a specialist to contact you and discuss further.
What is an execution only SIPP?
SIPPs are generally geared towards those who would prefer to make all their own investment decisions with their retirement savings. An execution only SIPP is a model that allows exactly that with no investment advice required or offered.
If you’re not quite ready to manage your own pension investment portfolio but quite like the idea of a SIPP, don’t worry. Many SIPP providers will offer investment advice if required (usually at an extra charge).
The main advantages of a SIPP would be:
- Tax relief on contributions and 25% tax-free lump sum at retirement
- Complete flexibility and control of investment portfolio
- Variety of different assets offering significant growth potential
- Ability to accept employer contributions
- Online access to your portfolio and switching facility
In addition to the above, a SIPP can also be used to raise finance to purchase commercial property. If you’d like to know more about how this works make an enquiry so an advisor we work with can get in touch.
The main disadvantages of a SIPP would be:
- Higher charging structure than a traditional personal pension (fees can include set-up fees, annual management charges and dealing charges for buying/selling shares)
- Can be higher risk than a normal pension if you’re not an experienced investor
If the potential drawbacks we’ve flagged up here worry you, get in touch. The pensions experts we work with will help you safeguard yourself against the possible risks.
You can read more on the advantages and disadvantages of a SIPP.
How much can I contribute?
SIPP rules for contributions follow the same guidelines as normal pensions, including the amount of tax relief available. For every £100 a basic rate taxpayer makes into their self-invested personal pensions the UK government will add a further £25 (i.e. 25% is the starter rate), for higher rate taxpayers a further £40 and for additional rate taxpayers £45.
The maximum you can save into a SIPP is either 100% of your total annual salary or the annual allowance of £40,000 (whichever is lower). This allowance can reduce for incomes in excess of £150,000.
Your SIPP fund is also subject to a lifetime allowance which rises in line with inflation each year and currently stands at £1,055,000.
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SIPP pension rules
Can my company make additional contributions on my behalf?
An employer is allowed to make contributions to your SIPP but is not under any obligation to do so. SIPP schemes are completely flexible and portable, therefore, if you leave your job a new employer can pick up these contributions if they agree to your request.
When can I access my SIPP?
As with traditional pension plans, you can begin to drawdown your SIPP funds once you reach 55 years of age. However, if you’re still working at this point you can leave your SIPP account in place until you reach your desired retirement age.
Options at retirement
Once you reach your retirement date and are ready to start drawing down an income from your SIPP there are a number of options available to you. These choices have become much more flexible following a series of changes to how pension income can be drawn down, introduced by the UK government in 2015.
If you wanted you could take the whole SIPP plan as one lump sum. However, as only 25% of the value is allowed to be taken tax-free, taking the remaining fund out at the same time could create a large income tax liability as this would be taxed at your marginal rate.
Unless the whole fund is required, you could simply take the 25% tax-free lump sum at the outset and drawdown the remaining SIPP pension at any time either as regular income or as ad hoc payments when required.
How safe is it?
As with any investment portfolio, the value of your SIPP can go down as well as up and the safety of your money is directly correlated to the asset classes you have invested within your SIPP.
Taking a risk averse approach will lessen the risk further but may reduce the potential for growth. The more you diversify your portfolio, across a wider range of assets, the more likely your portfolio will be able to smooth out any performance peaks and troughs.
What happens if my provider goes bust?
If you lose money as a result of what you believe to be misleading investment advice, poor fund management or if the SIPP fund manager has gone into administration you could be entitled to up to £85,000 compensation through the Financial Services Compensation Scheme (FSCS).
For more information on how the FSCS protection works take a look at the dedicated website. Alternatively, make an enquiry and we can arrange for a SIPP specialist to get in touch and discuss directly with you.
How does a SIPP differ from other pension schemes?
SIPPs and personal pensions
As the name implies, a SIPP shares many attributes that you will find with a traditional personal pension. Contributions and tax relief rules are identical as are the options available for drawdown when you reach retirement.
The freedom of investment choice is the key difference between the two and are far greater with self invested personal pension plans. The fund choices with personal pensions, in comparison, are restricted to those offered by the fund manager.
SIPP and an SSAS
A SIPP is a personal pension plan whereas a SSAS (Small Self Administered Scheme) is classed as an occupational pension scheme, typically arranged by the directors of a business. An SSAS has a member limit of 12 and the members also act as Trustees of the fund which can lend money back to the sponsoring company.
A SIPP is open to anyone but the provider acts as the trustee rather than the member. A SIPP member has their own SIPP account and cannot lend back to a sponsoring company because there isn’t one.
You can read more about how SIPPs compare to SSASs.
SIPP and a wrap
In the UK, a SIPP, like all pension plans, is basically a tax-efficient wrapper for your retirement savings where you can reap the benefits of tax-relief on contributions and take a tax-free sum when you retire.
A wrap is not a pension fund at all. It acts as a larger holding tank for all different types of tax wrappers such as SIPPs and other tax-efficient savings schemes such as ISAs.
The benefit of a wrap is that all your investments, both short and long term, are kept under one roof.
How do I find the best SIPP deals?
You should leave that to an expert pensions advisor. The ones we work with will search the market on your behalf and introduce you to a SIPP provider based on your needs, circumstances and investments – make an enquiry to start this process today.
Speak to a SIPP pensions expert
SIPPs have become a popular form of retirement planning and due to their complexity its important you understand all the potential risks beforehand. Lots of people in your situation seek professional advice to assist them before making a final decision.
If you have questions and want to speak to an expert for the right advice, call us today on 0808 189 0463 or make an enquiry here.
Then sit back and let us do all the hard work in finding the pensions advisor with the right expertise for your circumstances. We don’t charge a fee and there’s absolutely no obligation.
Can you have a joint SIPP? ❯
A SIPP pension wrapper consists of many sub funds that are ring-fenced for each individual member, therefore, a joint SIPP is not possible but it is quite normal to have more than one SIPP running concurrently.
What is a SIPP account? ❯
A SIPP account is simply a different term used to describe SIPP plans. It could also be used to describe SIPP savings accounts or bank accounts (outlined below).
Can I have one if I’m a non UK resident? ❯
Yes, it’s possible. Whilst there could be some limitations on fund availability, SIPPs are available for non UK residents. Be aware that as a non-UK taxpayer there will be no tax relief available on any contributions you make.
A lot of non UK residents, who live abroad for employment purposes, contribute to SIPPs on the basis that they may move back at some stage on or before they reach retirement.
It’s important you receive the right advice in this area, therefore, if you make an enquiry we can arrange for an advisor we work with, who specialises in offering advice to non UK residents, to get in touch.
What is a SIPP bank account? ❯
Cash can prove to be quite a popular asset class for SIPP members, particularly as they move closer to their retirement date. In these circumstances, it would make sense to switch large portions of your funds into a SIPP bank account in order to crystalize and secure your money from any stock market volatility.
SIPP bank accounts can usually be monitored online and, depending on the provider, may offer access across a number of major international currencies.
What is a family SIPP? ❯
A family SIPP, as the name suggests, is the pooling together of two or more individual SIPPs for the mutual benefit of utilising different asset mixes across each separate fund.
For example, if one SIPP is heavily invested in property and another is mainly in cash, by pooling both SIPPs together under one umbrella, the liquidity can be made available for further long term investments in different asset classes.
Can a SIPP deal directly in stocks and shares? ❯
Yes, it’s definitely possible. Most providers will offer SIPP members access to online platforms , such as Stocktrade, in order for them to buy and sell stocks and shares for their SIPP.
If you’d like to know more about these types of services available through your SIPP pension, make an enquiry and we will arrange for a specialist to get in touch.
Can I buy overseas property with a SIPP? ❯
As long as the use is for commercial purposes (to rent out) then you can purchase overseas property to place inside your SIPP wrapper. Be mindful of the risks involved with purchasing a property overseas – currency fluctuations and local taxes, for example.
What is a bed and SIPP arrangement? ❯
A bed and SIPP transaction allows you to top up your SIPP pension fund by selling existing investments and use these proceeds as your contributions rather than coming from your income allowance.
Can I trade options using a SIPP? ❯
There are a few SIPP providers who could provide a platform for options trading. It may be advised to take professional advice before engaging in this type of investing. If you get in touch we can arrange for an expert to contact you with more information.
Are Contract For Differences allowed? ❯
As with options trading, Contract For Differences (CFDs) are allowed to be traded within a SIPP, however, it is advised you take professional advice before proceeding. Make an enquiry and we can arrange for an advisor we work with who has experience in this field to get in touch.
How do I close a SIPP? ❯
Some SIPP holder choose to close their accounts and transfer their assets elsewhere. To go about this, simply contact your scheme’s provider, but keep in mind that there could be exit fees to pay (around £50 is standard) if you’re closing your SIPP.
Can I leave a SIPP in my will? ❯
Yes, and if you die before the age of 75 your beneficiaries can choose to take their share of the money as a lump sum or keep it invested. You can read more about what happens to a SIPP when you die.
Can I keep my SIPP if I become unemployed? ❯
Yes, and you can continue investing capital in it, up to £3,600 per year.
Does having one affect the benefits I’m entitled to? ❯
Having a SIPP and taking money from it could affect your eligibility for means-tested benefits, including…
- Housing Benefit
- Income Support
- Income based Jobseeker’s Allowance
- Income related Employment and Support Allowance
- Pension Credit
If you are over pension credit age, any income in your SIPP that you’re legally entitled to would be taken into consideration when your capital and income is assessed for a benefits claim, and this could impact on the amount of benefits you can claim or whether you qualify for financial assistance at all.
For SIPP account holders under pension age, only the amount of capital that has actually been taken from the pension will be treated as income.
Can I get an international SIPP when moving abroad? ❯
Yes, potentially. International SIPPs were designed for those who plan to retire abroad – but the big question is whether you should take out an international SIPP or a Qualifying Recognised Overseas Pension Scheme (QROPS) if you’re emigrating.
The good news is that we have an entire article on SIPP vs. QROPS that you can turn to for information, or better yet, make an enquiry and one of the pensions experts we work with will provide guidance on the benefits and drawbacks of both product types and help you determine which one is the best fit for you.
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About the author
Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.
Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.