Self Invested Personal Pensions (SIPPs)

A SIPP stand for “Self Invested Personal Pension” and allows the holder to make decisions around which investment (approved by HMRC) make up the pension which usually makes it easier to manage. Rules introduced in 2015 mean that you can access your SIPP more freely from the age of 55.

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What are SIPP pensions?

A SIPP pension is a "Self Invested Personal Pension". SIPPs are a common feature in the portfolio of committed, switched-on investors; SIPPs offer exciting flexibility, but are more demanding to run than other types of pension.

A SIPP is often described informally as a "DIY pension" – because the holder does a lot of the decision-making around the investments. A SIPP allows you to exercise a lot more control over your pension investments than any other type of pension.

SIPPs are compatible with other pensions and you can transfer out of your workplace pension into a SIPP. You can also run your SIPP alongside any other pensions you may have.

One of the key advantages of SIPPs, like all pensions, is that you can pass them on to your beneficiaries in the event of your death without paying Inheritance Tax (IHT).

If you are thinking of investing in a SIPP, be aware that charges exist. Even with a low-cost SIPP, a setup fee, annual management charge and dealing charges (if using the SIPP to trade stocks and shares) may apply – It is always good to speak to your Financial Adviser about the fees & charges that are applicable to your SIPP.

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What are SIPP investments?

SIPPs offer more flexibility than other types of pension when it comes to what you can invest in. Allowable investments vary depending on the SIPP provider, but your SIPP might commonly allow you to invest in:

  • Commercial property
  • Quoted and unlisted UK and overseas stocks and shares
  • Commodities
  • Collective investment schemes
  • Structured financial products
  • Investment trusts

Exotic assets – such as wine, luxuries, cars – are generally not permitted as investment vehicles by SIPP providers, because they attract taxation from HMRC.

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Who is a SIPP suitable for?

A SIPP is only for you if you are a seasoned investor or you have an experienced Financial Adviser to guide you through the process and management of your SIPP.

A great advantage of a SIPP is the flexibility it gives you when it comes to managing your investments. You can invest in all sorts of assets not accessible with other pensions, so you may not want to miss out. If you’re lacking in confidence with personal finance, engage an IFA to keep an experienced eye on your SIPP aswell as the rest of your financial portfolio – to ensure you get the most of your investments.

Like other personal pensions, SIPPs are suitable for people with families who want their family to benefit in the best possible way when they die. A SIPP is a great option for this as they can be passed onto beneficiaries without Inheritance Tax (IHT), and without personal tax penalty to the recipient if the pensioner is aged below 75 years old when they die.

If you were to die before you turned 75 then it would be down to your beneficiaries to choose whether they wanted to take their share of the money as a lump sum or to keep it invested in the pension, making withdrawals as required. This would mean there would be no IHT and no liability for income tax for the beneficiaries. Should you die after the age of 75 however, then your beneficiaries would still be required to pay income tax at their marginal rate on any withdrawals from the pension. There would still be no requirement to pay IHT though.

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How are SIPP withdrawals taxed?

SIPP withdrawals in the UK are taxed the same way as other personal and workplace pensionsx: for each withdrawal that you make, 75% of it will be taxed as if it were normal income. That means 75% of every withdrawal will be subject to your own tax band rate of 0%, 20%, 40%, 45%.

Below is a table taken directly from the government pension advisory service website which shows how all pension pots (including SIPPs) are taxed at the point of conversion/cashing in:

Pension option What’s tax free What’s taxable
Leave your pot untouched Your whole pot while it stays untouched Nothing while your pot stays untouched
Guaranteed income (annuity) 25% of your pot before you buy an annuity Income from the annuity
Adjustable income 25% of your pot before you invest in an adjustable income Income you get from your investment
Take cash in chunks 25% of each amount you take out 75% of each amount you take out
Take your whole pot in one go 25% of your whole pot 75% of your whole pot
Mix your options Depends on the options you mix Depends on the options you mix

Pensionwise.gov.uk

SIPP: when can I withdraw?

You can start making withdrawals from your SIPP at the age of 55. This age threshold applies to withdrawals on all personal and workplace UK pensions.

Tax rates, allowances and reliefs are as at May 2019 and are subject to change in the future. The benefit of any allowances and reliefs depends upon your personal situation and may also change over time.

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