What Is A Sipp? And How To Open One – Forbes Advisor UK

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A self-invested personal pension (SIPP) is a type of pension that individuals can set up, typically using an online investment platform. 

As a SIPP-holder, you get tax benefits as you would with any form of pension saving, but instead of the pension or investment company choosing the underlying investments, you’ll get to pick them yourself, with or without the help of a financial advisor.

For those with the time and confidence in selecting their own investments, a SIPP can be a flexible way to save towards retirement.

What is a SIPP?

One way to think of a SIPP is as a do-it-yourself pension. 

As the name suggests, when you ‘self-select’ the assets and investments that go into your pension ‘wrapper’, which is what a SIPP is, you have much greater control over your pension.

With a more traditional pension fund, the pension company or investment manager chooses the investments for the pension scheme as a whole.

While most SIPPs are private pensions (also known as personal pensions), in some cases employees can set up a SIPP and their employer will pay into the pot.

But whether an employer pays in or not, with a SIPP you’re the one calling the shots about how the money is invested. It means you can pick the investment funds, individual stocks or other assets, to put in the pension, and you’ll manage your investments over time.

How does a SIPP work?

Investors can start a SIPP with an online investment platform or fund broker. You can start by investing a lump sum or with monthly contributions, or a combination of both. 

Most SIPP providers will impose a minimum investment amount (this might be a lump sum of £1,000 for example), but many accept low monthly contributions, typically from around £25, so there are different SIPP plans to suit most budgets.

As noted, you can select and manage the investments yourself or you might prefer to use a financial adviser. An adviser can help pick the investments on your behalf, based on your risk profile and investment goals. But while this option may be more convenient and potentially less risky, you will pay a fee for the service.

Alternatively a robo-advisor is a half-way house between using a financial advisor or going it alone. A robo-advisor can offer a tailored investment portfolio at a lower cost by using technology to select investments to build a portfolio suitable for your stated needs and risk appetite.

SIPP investors get tax relief at their highest rate. For a basic rate taxpayer that means for every 80p invested, their savings are boosted by tax relief of 20p, taking the total sum invested to £1.

Higher-rate taxpayers can claim up to a further 20% in tax relief through a self-assessment tax return (taking total tax relief up to 40%). And additional-rate taxpayers can claim back up to a further 5% still, leading to tax relief worth 45% in total.  

In the tax year 2023/24, investors can get tax relief on their pension contributions up to 100% of annual earnings or a maximum of £60,000 per year, whichever is lower. This allowance includes your own and your employer’s contributions, if there are any, and any associated tax relief.

How do I open a SIPP?

There are many fund platforms and brokers offering SIPPs. It is important to compare the different services, looking at the range of investments on offer and the fees and charges applied (more on this below) before you open an account.

We have compiled a list of our pick of the best SIPP providers, looking at some of these factors as well as customer experience ratings as published on Fairer Finance.

Different platforms will suit different pension savers depending on the assets they want to invest in (pooled investment funds or individual stocks, for example), and how often they expect to be trading investments (buying and selling stock, for example).

To open a SIPP, you’ll usually need to give your chosen provider your personal and financial details, including your National Insurance number and proof of address, to prove you are a UK resident and your tax status.

What investments can I put in a SIPP?

A huge range of assets can be held within a SIPP. This flexibility and breadth of investment choice is what makes SIPPs popular with many pension savers.

The different assets and investment you can put in a SIPP include:

• cash
• individual stocks and shares 
• pooled investment funds, such as unit trusts and investment trusts
• exchange traded funds
• bonds (government gilts and corporate bonds) and bond funds
• commercial property and property funds.

What you can put in your SIPP will be limited by the range of investments on offer from the SIPP provider or platform you choose with some having a wider choice than others.

What about charges on a SIPP?

SIPP investors need to think about the charges on their pension savings. There are a number of fees to consider and compare between different SIPP providers:

Platform fee

This is the fee, usually an annual charge, applied by the SIPP provider for holding your pension. 

Some platforms or online brokers may not charge a platform fee, preferring to recoup their costs through higher trading fees. Some charge a flat platform fee while others charge a percentage, such as 0.25% of your portfolio value. 

Some platform fees are tiered, so you’ll pay a percentage fee on the first portion of your pension value, and then another fee, typically set lower, on the next portion beyond a stated threshold. It should mean the fees become more economical as your pension pot grows.

Trading fees

You’ll typically be charged a fee each time you buy or sell assets, such as individual stocks, or when buying units in a pooled fund, such as a unit trust. 

These fees can vary widely between providers. Many SIPP providers don’t charge for share trading or for buying unit trusts and other funds, while some trading fees can be more than £10 a time.

Annual management fees

On top of the charges that the fund platform or SIPP wrapper provider will charge, you’re also likely to pay annual management fees on the funds you hold within your pension.

Other fees to consider are drawdown charges, which might apply at the point you want to start accessing the funds in your SIPP, transfer fees if you want to switch SIPP provider, and also fees for closing a SIPP. 

Always find out what fees will apply in different scenarios to avoid shock charges down the line.

When can I access the funds in a SIPP?

The money in a SIPP can’t be accessed until you reach 55 (this is rising to 57 by 2028). 

At 55 (or 57) you can access your whole SIPP and take 25% as a tax free lump sum. You can also access your pension in phases (known as phased drawdown), which means the remaining funds in the pot can continue to be invested and grow. 

Alternatively you can use the proceeds of your SIPP to buy an annuity, which provides a fixed income for life. Drawdown funds and annuity income above your annual personal allowance are taxed as income at your marginal rate once you’re in retirement.

What are the pros and cons of a SIPP?

Pros

• flexibility SIPPs tend to be a more flexible pension saving option giving greater control to investors to choose and manage their underlying investments
• consolidate savings SIPPs an be used to consolidate other pensions (pension funds can be transferred in from other schemes)
• broad investment choice SIPPs allow you to choose from a wide range of asset types, including commercial property, equities, equity funds and bond funds
• earlier access than some workplace pensions funds can be accessed from age 55 (57 from 2028)
• inheritance tax planning SIPPs can typically be passed on to loved ones when you die with no IHT to pay (withdrawals from the SIPP will usually be taxed as income if you die after the age of 75).

 Cons

• high fees SIPP fees and charges can be high, particularly for frequent traders
• Risk there is higher risk involved if you are picking your own investments without financial advice
• pension policy could change Pensions can be political and the tax benefits, lifetime limits and allowances, plus other rules around pensions could be changed by government at any time, so this poses some risk, particularly to investors with a sizeable pension pot.

Is a SIPP right for me?

This will depend on a range of factors, including how confident you feel about selecting your own investments and managing them over time. You could opt for financial advice to help build a balanced portfolio of investments, but this will come with a higher fee.

Overall SIPPs often tend to suit those with a larger pension pot and who are keen to take charge of their own investments. SIPPs typically suit more experienced investors who are confident about doing their own research. They can particularly suit those who want a broad range of investments within their pension plan.

Should I transfer my existing pensions into a SIPP?

You can transfer most types of personal or workplace pensions into a SIPP. But whether or not it’s the right choice for your retirement planning is likely to be complex.

There can be benefits to consolidating pensions within a SIPP, not least having all your savings in one place, which makes for easier monitoring, and potentially lower charges. 

But transferring pensions also involves fees and penalty charges. You could also lose valuable benefits locked into other pensions by moving them. These benefits could include guaranteed annuity rates, pensions paid to a spouse if you die plus tax-free lump sums on retirement. They may not always be immediately obvious until you look into the details of the individual schemes.

It is important to get independent and expert pensions and financial advice before transferring pensions to ensure you fully understand the implications, including any tax liabilities and the relative benefits of your other pension schemes.