A self-invested personal pension (SIPP) is a type of personal pension. It is sometimes referred to as a ‘do-it-yourself’ pension, due to the freedom of being able to choose and manage your own investments. Generally, this management will be done online, where you can see how much money is in your pension as well as where it is invested.
Another option available is to pay an investment manager to decide which investments are included within the SIPP. A number of robo-advisors also offer this option.
The following guide should outline how a SIPP works, the types of SIPPs available, the advantages and disadvantages involved when you invest in a SIPP, and questions to ask yourself before you invest in a SIPP.
How Does a SIPP Work?
A SIPP holds investments within a wrapper for you until you retire or begin to draw your pension. It falls within the same bracket as a standard personal pension but you can have greater control over where you invest. It is often used by more experienced investors who feel comfortable managing the investments they would like to include in their personal pension.
Whilst choosing to invest in a SIPP should give you more flexibility in terms of your investment choice, the accessibility to your funds remains the same as a normal pension. Under current regulations, you cannot access your pension until you are aged 55 or over, with this set to increase to 57 as of 2028.
Once you are eligible to gain access to your pension you can withdraw up to 25% as a tax-free lump sum, with the remainder being taxed as earned income at your personal marginal rate, dependent upon your financial situation.
However, if you are a non-earner, you will be restricted to investing up to £2,880 into a SIPP with a tax relief of 20%.
Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
What can you invest in a SIPP?
You are able to include a number of different investment types within a SIPP. This gives you control over your portfolio whilst also the flexibility to make changes when required.
The list below includes some of the investments that can be included within a SIPP:
- Stocks and shares
- Investment trusts
- UK & foreign government bonds
- FCA recognized Open Ended Investment Companies (OEICs)
- Gilts and bonds
- Exchange traded funds (ETFs) traded on the London Stock Exchange as well as other European markets
- Bank deposit accounts
- Commercial property
- Real estate investment trusts
- Offshore funds
Types of SIPP
There are two main types of SIPP:
- A Full SIPP
With this type of SIPP you can receive financial advice about what to include within your SIPP. and it tends to offer the widest choice of investment, but in turn generally has the highest charges. Therefore, a Full SIPP is generally more suitable to those with a larger pension fund.
- A Low-Cost SIPP
Unlike a Full SIPP, you can be in control of the decision-making process, without any form of financial advice being taken. However, this can mean that the fees charged on the investments may be lower.
SIPPs in 3 Bullet Points:
- You can invest up to £40,000 before tax into your SIPP in 2017/18 tax year.
- You can withdraw up to 25% of your SIPP as a tax-free lump sum on or after you 55th birthday.
- You can transfer existing pensions into your SIPP to collate them all in one place.
OFF3R has a Self-Invested Personal Pensions (SIPPs) channel that lists some of the leading SIPP providers in the UK and allows you to compare the opportunities currently available:
Please head over to the OFF3R SIPPs channel to compare providers.
Should You Invest in a SIPP?
Like almost any form of investment, your money is at risk when you invest in a SIPP. To help you decide whether this form of investment is for you, we’ve listed what we believe are the advantages and disadvantages, along with a list of questions to ask yourself before investing, below:
Advantage – High level of control
Due to the DIY nature of a SIPP, you hold a large amount of responsibility. From choosing what to invest in, viewing the value and performance of your SIPP to choosing when to withdraw (after your 55th birthday). However, this level of responsibility may not be right for everyone, therefore, if you are unsure about this type of investment you should seek financial advice.
Advantage – Simple transfer of existing pensions to your SIPP
You can transfer money in from your existing pension pots. For investors who have a variety of different pensions this option to consolidate them into one can be attractive. Particularly if your current pension is experiencing poor performance and you wish to take more control of your investment. However, before making the decision to transfer you should be aware of any fees that your current provider may charge for doing so.
Advantage – Tax benefits
As well as being able to take up to 25% of your SIPP tax-free upon turning 55, any growth of the investments in your SIPP is also free of UK capital gains tax and UK income tax.
If you pass away before you turn 75 and there is any money left in your pension, this money can be withdrawn free of inheritance tax by your heirs. However, if you pass away after the age of 75 they will be subject to income tax on any money withdrawn.
Advantage – Access to a wide range of different asset classes
Unlike a traditional personal pension, where your investment choice is limited to a list of funds as dictated by your provider, with a SIPP you can choose your own investments across a variety of different asset classes. The full list of asset classes is listed here.
Advantage – Low monthly contributions
Generally, many SIPP providers will require monthly contributions into your SIPP. However, on the whole, these contributions tend to be relatively low. For example, the Vantage SIPP offered by Hargreaves Lansdown requires an initial lump-sum contribution of at least £100, followed by monthly contributions of just £25.
Disadvantage – Be aware of fees
Many SIPP providers will charge a number of different fees. These can include:
- Management or Administration fees – typically an annual charge paid to the provider of the SIPP.
- Transfer fees – a fee for every time you buy or sell assets within your SIPP.
- Additional Fund Manager Fees – depending on what you hold within your SIPP there may be additional fees due to the fund managers of any fuds you hold.
It is important that you are aware of and consider all potential fees before selecting a SIPP provider.
Disadvantage – Effective SIPP management takes time
Whilst one of the advantages of investing in a SIPP is the amount of flexibility it provides, with this comes a significant amount of responsibility. Therefore, it is important to be aware that if you are wanting to get the most out of your SIPP then you need to put the time into managing your investments.
Disadvantage – Early withdrawals may incur high penalties
As with any pension scheme, you will incur a penalty if you withdraw money from your SIPP before you are 55. These penalties can result in having to pay fees to HMRC of between 55% to 70% of the sum accessed, dependent on the amount. 
Questions to ask yourself before you invest in a SIPP
- Are you willing to take responsibility? Whilst a positive of a SIPP is the variety and flexibility of investment choice, with this comes a great deal of responsibility. If you are someone who understands investing, or willing to take time to do the research then a SIPP could be a good way to bring your existing pensions together into one place. However, if you are not comfortable with selecting your own investments, as well as managing this portfolio then you should look seek further advice on your pension options.
- Are you happy to invest your money for the long-term? You should be aware that when you invest in a SIPP, as with all other pensions, it is a long-term investment with the aim of helping to fund your retirement. Therefore, if you will need access to your pension pot prior to turning 55 then a SIPP is perhaps not suitable for you.
- Are you aware of the risks involved? A SIPP is not risk-free, and to someone not used to dealing in shares or other investments, it has the potential to prove a costly mistake. You need to be comfortable with understanding what you are investing in before you invest in a SIPP.
Please head over to the OFF3R SIPPs channel to compare providers.
As with all investing, your capital is at risk. The value of your pension can fall as well as rise and you may get back less than you invest. Eligibility to invest in a pension depends on personal circumstances. Tax rules may change in future. If you need help with pensions, seek independent financial advice. Note that you can’t withdraw money from a personal pension until you’re 55. Past performance is not a guide to future performance and some investments need to be held for the long term.