SIPPs: an investment guide

Self-invested personal pensions (SIPPs) are one way to save for your retirement. Their main advantage is the freedom to invest in whatever assets you want. Read our jargon-free guide to find out more.

 Sipps benefit from transfers

Self-invested personal pensions (SIPPs) are one way to save for your retirement.

Their main advantage is the freedom to invest your money in whatever assets you want – such as shares and investment trusts. In this way, SIPPs make you the manager of your own pension fund.

The rules governing contributions and withdrawals are the same as for other personal pensions.

But SIPPs offer you greater flexibility, choice of investment and potentially lower costs than other pension plans. They were originally aimed at those with larger pension pots but, as charges have come down, it is now possible to run a SIPP even if you’re only putting £50 per month into your pension.

There are a variety of different SIPPs available, ranging from those which can only hold funds and are not much more than a glorified personal pension plan to ‘full’ SIPPs offering access to any investment authorised by the government.

SIPPs versus other pension plans

SIPPs are governed by the same tax and contribution rules as other pensions, so for any contributions you make – whether or not you are a taxpayer – your SIPP provider claims back 20 per cent (equivalent to basic rate tax) from the government and adds it to your pot. Higher-rate taxpayers can reclaim another 20 per cent through a self-assessment form.

The arithmetic of this tax relief can seem confusing. In short, if you pay in £800 then the government will add another £200, giving £1,000 in total. So while it’s 20 per cent of what you end up with, it can also be considered a hike of 25 per cent on what you put in.

Provided you pay income tax, you can put up to 100 per cent of your annual income into your SIPP, up to a limit of £40,000 a year. If you’re not a taxpayer, you can put in a maximum of £2,880 a year and still get the tax top-up of 20 per cent (leaving you with £3,600).

SIPPs permit you to invest in any asset approved by the government. These include (but are not limited to): shares, bonds, cash, ETFs, unit trusts, investment trusts, commercial property, derivatives, and gold. You pay no capital gains tax or income tax on these assets while they remain inside the SIPP, though you’ll still pay stamp duty on purchases.

In theory, you can also invest in residential property and things like wine or art through your SIPP, but HMRC will impose hefty tax penalties on you if you do.

Remember that although SIPPs are flexible when it comes to your choice of investments, you still can’t withdraw the money until you turn 55, just like a normal pension. When you can claim the pension, the rules are the same too: you can take up to 25 per cent as a tax-free lump sum, using the rest for income in retirement (subject to income tax). In the event of death before retirement, the entire fund is paid out tax free.

Also don’t forget that if the value of the SIPP surpasses your lifetime allowance (£1,073,100 for 2020/21 tax year) at retirement, anything above that limit is taxed at 55 per cent.

Do you need a SIPP?

People normally use SIPPs so that they can concoct a uniquely blended pension portfolio from their favourite funds, shares, commercial property, cash, National Savings products, and traditional insured funds. If you’re not interested in constructing such a portfolio, you probably shouldn’t use a SIPP. A good quality personal pension offering three or four choices and low annual charges (around 0.5 to 0.75 per cent) should be more than adequate for your needs.

How to choose a SIPP

Choosing the right SIPP can be a confusing process. It is important that you end up with a SIPP that can do everything you require of it, but also offers value for money. The last thing you want is to be paying for a degree of flexibility that you will never use.

SIPPs come in very different shapes and sizes – from low-cost to hybrid to bespoke – and with confusing charging structures.

Low-cost SIPPs, which are designed for the vast majority of pension savers, offer access to thousands of funds at reduced charges. It’s then just a case of picking the right ones. The more flexible low-cost SIPPs will also allow you to invest in shares, bonds and cash – basically, anything that can be easily traded or managed on an online platform.

The biggest drawback of low-cost SIPPs compared to more expensive variants is not being able to hold commercial property or unlisted shares.

Low-cost SIPPs tend to impose an annual fee, which might be a flat charge or a percentage of your investment portfolio. There will also be charges for buying and selling shares or funds (dealing fees).

However, some products provide a considerably wider choice. These go all the way up to ‘full’ SIPPs, which allow you to invest for your retirement through assets traded on any recognised stock exchange worldwide, as well as structured products, derivatives and hedge funds.

They may also allow more offbeat assets, such as traded endowments, gold bullion and commercial property, or even – in one or two cases – unlisted private equity.

A full SIPP will charge you a few hundred pounds to set up the account, and then impose an annual fee of another few hundred pounds. This sounds like a lot, but it may not be if you have a seven-figure sum in your SIPP.

Knowing what’s right for you

If you want to control what your pension is invested in, you should opt for a SIPP.

If you just want a choice of funds or shares into which you can invest your pension, go for a low-cost SIPP.

If you want to pick your own complex portfolio from the widest possible range of assets, including commercial property, you’ll need a full SIPP.

Guide originally published: 4/9/12. Updated: 27/7/2020.

Related investment guides:

SIPPs versus ISAs – the two tax-efficient wrappers compared

Income drawdown – a flexible way to get income from your pension

Building a portfolio – the right assets to invest in for retirement

Investment trusts versus unit trusts – what funds to put in your SIPP

Saving for a pension – personal pensions versus workplace schemes

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