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What is a SIPP and do I need one?

You may have asked yourself what is a Self Invested Personal Pension, or SIPP? And you could also be wondering; do you need one?

Thanks to a raft of benefits, pensions are one of the most important tools for building long-term wealth. And a SIPP offers the ultimate flexibility and choice. It works just like a standard pension but you get to choose your own investments. But it comes with risk and responsibility, so it’s not right for everyone.

This article will walk you through why you might choose a SIPP, how to set one up and what you need to know. 

Plus, we’ll explore some of the larger SIPP platforms and some of the questions you’ll need to ask when choosing.

Heads up – We aim to produce honest and accurate content, however, we are not financial advisors. If you need financial advice, Unbiased can connect you with a suitable professional for free. Some of our links may earn us a small commission to help us run the site.

What is a SIPP?

A SIPP is a Self-Invested Personal Pension, which is a pension wrapper for your retirement savings. However, the key difference between a SIPP and a regular workplace pension is that you, as an individual, are in control.

Essentially, with standard pension schemes via your employer, your funds are managed by your platform provider. And crucially, that provider is usually chosen by your workplace. In turn, that provider may then select the fund you are invested in. In some cases, you may be able to choose between a few different funds, but ultimately the choice on offer is often restricted.

On the other hand, most SIPPs allow you to invest your retirement funds in a wide range of assets including stocks, bonds and commodities. Ultimately, the decision is yours. You alone can choose where to place your money. In fact, you can move between platforms and providers if you’re not happy. In many ways, it’s ultimate control over your retirement planning.


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Why not use your workplace pension?

In 2012, the government introduced the auto-enrolment scheme. This was where every employee was made part of a work-based pension without needing to be asked. Before then, it was down to the individual to make pension arrangements. For many, it was daunting, time-consuming and complex.

Fundamentally, these workplace pension plans via auto-enrollment were set up to be as easy as possible to use. It was all taken care of. In many cases, employees merely have to select the risk level they want to take with their pension. Done.

The challenge, is that there is typically only a restricted set of funds available for employees to invest in. For example, if you want to invest in a particular company or specific fund (such as ethical/environmental), then it’s unlikely you have that choice with most workplace pensions.

With a SIPP, however, you can choose from a wide range of investments, including individual companies. You also get exposure to other financial funds and even commodities, giving you practically unlimited investing options.

SIPP and employer contributions

With a work-based personal pension, employer contributions are a huge benefit. This is where your employer also contributes to your pension.

Currently, the minimum auto-enrolment contribution to qualify for a pension scheme is 8% of your salary. Of that, a minimum of 3% must come from the employer. In fact, many employers offer far more.

For example, if you contribute 5% of your salary to your pension, your employer may match you and also contribute 5%. You’ve just doubled your money…for free! Plus, it will compound over the years. Nice.

You need to check with your employer whether they will make their contributions outside of their chosen pension provider and pay into your SIPP.

If not (which is likely), you may want to pay just enough into your work based pension to meet your employers maximum match, then pay the rest into your SIPP.

How does a SIPP work?

A SIPP works in the same way as a standard pension, with the same rules and limits, but now you get to choose how you invest.

Essentially, a SIPP opens up a vast range of investment options that wouldn’t usually be available to you through your employers chosen pension provider. So you now have the power to choose what to invest in, when to buy or sell and what level of risk you want to take.

Of course, with power comes great responsibility. How your pension performs is down to you, through the good times and bad. This is where seeking the advice of a qualified professional is a good shout.

How do I open a SIPP?

You can open a SIPP with many popular investment platforms including Hargreaves Lansdown, Fidelity or Interactive Investor. These platforms offer a wide range of investment choices. Costs can vary though, so remember to check and compare the fees.

Alternately, you can choose a platform such as Nutmeg or Vanguard. Here, options may be more restricted, but newer investors may find them easier to use and possibly cheaper.

And if you like things nice and easy, you can consolidate all your pensions into one easy interface through PensionBee.

Once you’ve opened your account, simply make an initial deposit, set up a regular payment and start paying in money.

SIPP providers

Choosing a SIPP provider can be tricky. Understanding what you want to invest in and how often will help you pin down a good platform.

Plus, our guide on How to choose the right investment platform for you is worth reading to help you understand the key decision points.

Here is a list of common SIPP providers with a brief description to help you get started.

How does tax work in a SIPP?

Most SIPP providers will automatically apply basic rate tax relief to your contributions. That means when you deposit £80, the platform provider will automatically claim back the £20 tax you would have paid.

For higher rate taxpayers, most platforms will make you claim back any additional tax using an online form. This is a manual process, so if you forget, you’ll be missing out on huge perks. Definitely an activity to stick in the calendar, with lots of reminders.

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SIPP benefits and restrictions

A SIPP is a type of pension and therefore has the same rules and restrictions:

  • Contribution allowance – contribute up to £40,000 per year (this includes the tax you claim back).
  • Tax relief – claim back any tax you would have paid. This is 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers.
  • Reduced allowance – once you start drawing down your pension, however, the amount you can pay in each year reduces from £40,000 to just £4,000.
  • Lifetime allowance –  the current Lifetime Allowance of your pension value is £1,073,100. Withdrawals from pensions above this amount are subject to 55% tax. Ouch.
  • Tax-free savings – you won’t pay any Capital Gains Tax on your profits.
  • Restricted access – no access until at least your 55th birthday (currently).
  • Tax-efficient withdrawals up to 25% – you can withdraw up to 25% tax-free, once you reach the minimum pension age, currently 55. This can be either one lump sum or multiple withdrawals.
  • Pay tax on further withdrawals – after taking your 25% tax-free, any income you take from your pension will be subject to income tax.

What can you invest in with a SIPP?

Essentially, a SIPP allows you to invest in stocks and shares, funds, bonds and commodities. This means a SIPP can provide access to the same set of investments that your Stocks and Shares ISA can.

Additionally, within a SIPP wrapper, you can also invest in commercial property, hedge funds, hotels, some NS&I products, physical bullion and certain types of land. While this might sound great, the providers that support these types of investments usually charge large fees which may offset some of the benefits.

The table below (courtesy of Hargreaves Lansdown) is an example of the SIPP options available from Hargreaves Lansdown compared with a typical work-based personal pension.

Remember, each platform has its own offering. If you want to invest in something specific, make sure you check with the provider.

Investment options Personal Pension SIPP
Collective investment funds
  Unit trusts No Yes
  Investment trusts No Yes
  Open-Ended Investment Companies (OEICs) No Yes
  Exchange-Traded Funds (ETFs) No Yes
  Insurance company funds Yes No
Stocks and shares
  UK shares No Yes
  Overseas shares No Yes
  UK government bonds No Yes
  Bonds and other fixed-interest securities No Yes
  Permanent Interest-Bearing Shares (PIBS) No Yes
Other options
  Cash Yes Yes

What CAN’T you invest in with a SIPP?

You can’t invest in residential property within a SIPP. This includes your home or any other property that could be used for residential purposes. The definitions by HMRC are a little vague but I would take this to mean houses, flats, student accommodation, HMOs and any Airbnb or holiday lets.

Who can open a SIPP?

To open a SIPP you must be under the age of 75 and a UK resident.

You must be under 75 to contribute to a SIPP. However, if you have already begun drawing down, your annual allowance is reduced from £40,000 down to just £4,000.

Can I have more than one pension or SIPP?

There is no limit on the number of SIPPs or pensions that you can have.

Crucially though, the combined sum of your annual contributions across all pensions including SIPPs counts towards the annual pension allowance of £40,000.

Furthermore, the lifetime allowance of £1,073,100 also applies to the total value of all your pensions.

What we like about SIPPs

  • Choice – you choose what you’re invested in.
  • Freedom – choose the platform you like best or move between providers.
  • Reduced cost – you may find investments with cheaper costs than your work-based pension.
  • Management – if you have a preferred platform for your other investments you can manage your SIPP from the same interface.
  • Pension benefits – pensions are great for long term retirement savings and a SIPP carries all the same benefits – learn more about pensions here.
  • Protection – all SIPP providers are regulated and protected under the FSCS (Financial Services Compensation Scheme). However, your investment choices are NOT.

What we don’t like about SIPPs

  • Access – as with all pensions access is restricted until you are over 55.
  • Less protection – you are only covered by the FSCS for up to£85,000.
  • Manual tax management – if higher rate tax-payers forget to complete the necessary paperwork to claim back the tax, it could cost you tens of thousands.
  • Risk and responsibility – you make the decisions and take all the risks. A SIPP should be used by someone who understands investment risks and has sought professional advice.

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Do I need a SIPP?

Fundamentally, a SIPP can be well suited to those wanting more choice and control. Plus, they can also have lower charges compared with traditional pension plans, though not always.

However, before considering a SIPP, you should ensure you are making the most of your workplace pension benefits. If you are already maximising your employer’s match and are looking to make additional contributions of your choice, then a SIPP could be a route worth considering.

Pensions are an extremely important product for your financial future. Investing also carries risk, which means your investments could drop in value. This is one of those areas that’s worth chatting to a qualified financial advisor.

Is my money safe in a SIPP?

SIPPs are protected under the Financial Services Compensation Scheme (FSCS) up to a value of £85,000. This protection is applied per person, per financial institution.

By comparison, pensions have unlimited protection under the same scheme. There is no upper limit.

It’s important to understand that the FSCS protects you against a financial institution failing and not poor performing investments.

How do I learn more about investing in a SIPP?

Investing can be a minefield, especially if you haven’t invested before. Here are some resources that can help you build your confidence and get started. As always, with anything new, it’s best to start small.  There are too many stories out there of new investors yolo’ing their lifesaving away, I don’t want you to be one of them.

What is a SIPP and do I need one? - final thoughts

A SIPP can provide a great platform to invest your money the way that you want. However, be warned. By taking on a SIPP you are taking your retirement savings into your own hands. This level of responsibility can put many investors off.

If you’re employed, then maximising the benefit from your workplace pension is usually the most financially prudent option to explore first. Before going it alone, it’s worth making sure you are taking full advantage of these benefits.

Opening a SIPP and taking on your retirement savings is a big decision. Getting overconfident can be the downfall of many investors. So make sure you take your time and don’t put your hard-earned cash at risk.

If you want more support or to simply chat with other like-minded people, join our UK Personal Finance Club over on Facebook. We’ve got lots of great posts to help you out. I’d love to see you there. 

Here’s to Financial Fitness does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. If you need financial advice Unbiased can connect you with a suitable professional for free. Investments may go up as well as down and you may get back less than you put in.