Everything You Need to Know About SIPPs
Connor is a journalist with over 10 years' experience who specialises in finance and business news. Based in London, he also works for Sky News and the BBC.
Last updated 14th June 2024
A self-invested personal pension, known as a SIPP, offers a variety of perks when saving for retirement, including:
- Full flexibility over how much you save, and when.
- A wider choice of investment options.
- No capital gains tax on profits.
- Ongoing contributions from the government in the form of tax relief.
In this guide, you’ll learn everything you need to know about SIPPs — including how to set one up, when you can start making withdrawals, and a whole load more.
When should you set up a SIPP?
If you’re a worker, over 22 years old, and earn at least £10,000 a year, it’s highly likely that you’ll have been automatically enrolled into a workplace pension.
What’s pretty neat about such schemes is that your employer needs to make a contribution into the pot as well — at least 3% of your earnings.
While this is a good starting point, it’s worth remembering that there are additional pensions you can take out yourself which give greater control when trying to build a brighter financial future.
SIPPs are particularly valuable if you’re self-employed, as you won’t have been automatically enrolled into a workplace pension already. They allow you to still get ready for retirement and enjoy some of the financial perks enjoyed by those in full-time roles.
But SIPPs can also be highly beneficial even if you’ve got a pension with your current employer.
For one, you might already be contributing the maximum possible via your workplace, and looking to beef up your pension pot further — for example if contributions are only matched up to 3%.
Also, many workplace pensions are managed on your behalf, meaning you’ll have no input on where your savings are invested for the long term.
Whatever your circumstances, getting your pension prepared as early as possible is vital — and it’s also worth reflecting on the type of retirement you’d like to have.
The Pension and Lifetime Savings Association has worked out how much cash is needed a year for an individual to enjoy one of three lifestyles. They are:
| Standard of living | Amount needed | What this gets you |
|---|---|---|
| Minimum | £14,400 a year | £50 a week on groceries No car Week-long UK holiday £630 a year on clothes £20 for birthday and Christmas presents |
| Moderate | £31,300 a year | £55 a week on groceries £30 a week for dining out Three-year-old small car Two-week, three-star, all-inclusive holiday in the Mediterranean £30 for birthday and Christmas presents |
| Comfortable | £43,100 a year | Money to replace kitchen and bathroom £70 a week on groceries £20 a week on takeaways £100 a month to take others out for a meal Two-week, four-star holiday in the Med with spending money Three long weekend breaks in the UK £1,500 a year on clothing and footwear £50 for birthday and Christmas presents £1,000 to support your family members |
It’s important to note that this also assumes that you’re mortgage and rent-free — and given the increasing number of us who are securing home loans beyond state pension age, unfortunately this isn’t a given.
Seeing all of this in black and white is pretty stark — and underlines the importance of saving.
Would you really want a retirement where you couldn’t afford to go on holiday? Or even a cheeky Nando’s every now and then?
The good news is that the state pension, which currently stands at £11,502 a year, takes you very close to enjoying a minimum standard of living.
Having a full-time workplace pension on top of the state pension likely means you’ll be somewhere between a minimum and moderate lifestyle.
But… how much will you actually need?
Well, according to AJ Bell, savings of £490,000 are required for a moderate retirement — rising to £790,000 for a comfortable one.
While this may seem like a scary prospect, let’s take a look at how much you’d need to save a month to reach this figure by the time you turn 67, based on your current age.
This assumes a few things, including a growth rate of 4% — and that you’re starting from scratch.
| Current age | Monthly contribution for moderate retirement | Monthly contribution for comfortable retirement |
|---|---|---|
| 20 | £387 | £533 |
| 30 | £602 | £828 |
| 40 | £1,013 | £1,395 |
| 50 | £2,003 | £2,759 |
As you can see, it gets much harder as you get older. Why? Because your pension has got less time to benefit from compound interest, where you make returns on your returns.
However, a SIPP can help with these contributions.
This is not financial advice. All investments have risk. Past performance is not an indicator of future results.
Contribution limits and tax benefits
It’s in the annual limits — and especially in tax benefits — where a SIPP comes in handy.
Current government policies make it easier to achieve the retirement goals listed above — if you’re 30 and want to start saving for a comfortable retirement, your monthly contributions would actually come in at much less than the £828 a month when using a SIPP*.
Why? Because your deposits are eligible for tax relief — assuming you’ve not already received the tax relief on the funds you’re contributing.
For every 80p you save as a basic rate taxpayer, the government will throw in an extra 20p.
If you’re in a higher tax band, you will also be able to claim back another 20p on your self-assessment return — rising to 25p for additional rate taxpayers.
| Tax band | Tax relief | Claiming your relief |
|---|---|---|
| Basic rate | 20% | 20% automatically paid into your SIPP |
| Higher rate | 40% | 20% automatically paid into your SIPP, 20% claimed via tax return |
| Additional rate | 45% | 20% automatically paid into your SIPP, 25% claimed via tax return |
*SIPPs are an investment product, so you could lose money if the market saw a greater than 20% decrease in value over your investing timeline. In this unlikely scenario, more than £828-per-month would be required.
Assuming you’re within the necessary allowances, here’s how much saving for a moderate and comfortable retirement would actually cost you:
| Tax band | What you need to save to get £490,000 | What you need to save to get £790,000 |
|---|---|---|
| Basic rate | £392,000 | £632,000 |
| Higher rate | £294,000 | £474,000 |
| Additional rate | £269,550 | £434,500 |
It’s potentially worth jumping in for the prospect of some free money alone.
However, it’s worth noting that this “free money” is not nearly as generous as a 100% match (or higher) via your workplace scheme.
When it comes to limits, they’re generous too:
Most people can contribute 100% of their annual income up to £60,000 into a SIPP each tax year. This £60,000 is made up of £48,000 direct contributions from you, and £12,000 via government tax relief contributions.
The exception to this rule is if your annual income exceeds £260,000. If it does, your annual allowance will be reduced by £1 for every £2 that your adjusted income exceeds £260,000.
For example, if you earn £20,000 more than the limit, your annual SIPP contribution allowance will decrease by £10,000 (down to £50,000). This continues up to £360,000 annual income, where the annual SIPP allowance reaches its lowest point of £10,000. Whether you earn £360,000 or £2,000,000, your annual SIPP allowance is £10,000.
Your investment options
SIPPs open the door to a plethora of investment opportunities, including:
- Shares on the stock market, both in the UK and abroad
- Index funds and exchange-traded funds
- Investment trusts
- Bonds
Interactive Investor released some interesting statistics that reveal what their customers hold in SIPPs.
Funds were the most popular at 44%, followed by investment trusts at 22%, shares at 21.5%, and ETFs at 11.5%.
Many platforms offer ready-made plans that gradually reduce the risk in your portfolio as you near retirement.
When you can make withdrawals
If you’re planning to contribute to a SIPP, you need to make peace with the fact that you won’t be able to withdraw any funds from it for a while — potentially for decades.
Currently, the minimum age for accessing your money is 55, but this will rise to 57 from 2028.
Further increases may arrive in the future — and this will be based on whether the state pension age is put up.
Once eligible, up to 25% of a SIPP can be withdrawn immediately as a tax-free lump sum.
Unfortunately, you will need to pay income tax on the rest.
You might wonder: why get tax relief on your contributions if you’re going to be taxed on the income further down the line anyway?
Well, three reasons:
Firstly, this prevents you being taxed twice on your earnings.
Secondly, you may also move into a lower tax bracket in retirement, giving great benefits by deferring your tax payments — for example if you were an additional rate taxpayer when contributing, but only a basic rate taxpayer in retirement.
Finally, you can benefit from the potential power of compounding — as the saying goes, a bird in the hand is worth two in the bush.
If you’re able to invest a larger amount up front (thanks to the initial tax relief), your total return should be larger down the road if things go your way.
Potential downsides to be aware of
Always remember that there’s no guarantee of returns with SIPPs — and the value of your investment can go down as well as up.
And if you’re deciding to build your own portfolio rather than go with a ready-made plan, it may require regular management to ensure you’re investing in the right places.
Make sure you open a SIPP with a reputable provider, as fraudsters have been known to promise astronomical returns… only to leave their victims with nothing.
Last but by no means least, make sure you’re fully aware of your tax obligations — and factor this in when deciding what you’d like your end goal to be. This may require a conversation with a qualified financial adviser.
Done right, self-invested personal pensions are an excellent way of saving for the retirement you deserve after decades of hard work. And while contributions now can feel a little bit painful, just think about the fun and financial freedom that’ll await you in your golden years.
How to set up a SIPP
As long as you’re under 75, you’ll be able to open a SIPP. Many major investment platforms allow you to register for an account online and will guide you through the application process.
But there are a few bits of housekeeping worth completing first.
First, you’ll want to identify all of the pensions you may have with past employers. You can then decide whether you want to move these funds over to your newly established SIPP. This isn’t essential — you can keep your existing pensions and open a SIPP, it just becomes trickier to manage from an admin perspective.
Next, it’s important to reflect on your appetite for risk. As the name suggests, self-invested personal pensions mean you’re responsible for investing your own money.
You can choose your own investments directly, or you can opt for managed portfolios if you’d like a broker to choose your investments for you — though you’ll still decide how much you put in, and when.
When selecting a SIPP provider, make sure you take time to compare their fees.
You should also compare the other things that might matter to you such as ease of use, reputation, FSCS protection, and more.
While fee differences may seem modest in isolation, they can add up and significantly eat into the value of your pension pot. The most common charges include:
- A one-off fee for opening a SIPP
- Yearly administration fees for managing your account
- Fees charged by fund managers
- Trading fees whenever shares are bought and sold
- Fees for moving workplace pensions into your SIPP
Most providers will only charge a limited number of these fees, so it’s important to compare where you’re being charged and how much you’ll likely pay.
Finally, decide whether you’d like to make a lump sum investment into your SIPP, top up your account on an ad hoc basis, or make a regular deposit every week or month.
We rounded up the leading SIPP options in another guide, but here’s a comparison of some SIPP providers that you could consider using:
| Provider | Fees | What you’d pay |
|---|---|---|
| InvestEngine | 0.15% fees capped at £200 per year | £15/yr on a £10,000 balance £150/yr on a £100,000 balance £200/yr on balances above £133,333 |
| Vanguard | 0.15% fees capped at £375 per year | £15/yr on a £10,000 balance £150/yr on a £100,000 balance £375/yr on balances above £250,000 |
| Interactive Investor | £5.99 per month to £12.99 per month depending on balance, plus a £3.99 trading fee | £119.76/yr on a £10,000 balance* £203.76/yr on balances above £50,000* |
In addition to all of the above, you can also set up a Junior SIPP on behalf of a child, although the annual deposit limits are much smaller (£2,880 per financial year) than regular SIPPs, and they’re much lower than the Junior ISA limits too.
You will be in control of it a JSIPP until your child turns 18, then they’ll take ownership of it after that point.
Spotted a mistake? Get in touch.
Connor is a journalist with over 10 years' experience who specialises in finance and business news. Based in London, he also works for Sky News and the BBC.