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Self-Invested Pension Plans (SIPPs)

If you're looking to get the most out of your pension, you might consider a SIPP fund. Highly tax-efficient, here's what you need to know about SIPPs

For many of us, the day when we can finally retire and enjoy our hard-earned leisure years cannot come soon enough. This is what makes having a carefully managed and well-invested pension plan so important.

Of course, you certainly shouldn’t be waiting till your later years to start investing in your pension fund.  This is where SIPPs come in. Designed to give you more freedom as to how you invest your pension for a potentially greater investment return, SIPPs can help you boost your pension and save tax.

To see if a SIPP is right for you, here is everything need to know about them.

What is a SIPP?

A Self-Invested Personal Pension (SIPP) is basically a ‘do-it-yourself pension’.  You choose what investments you put into it and can manage your pension on an online platform, giving you more control over your retirement savings.

You can either make your own investment decisions or appoint an investment manager or financial adviser to make investment decisions for you.

A SIPP enables you to invest directly in any of the following areas subject to trustee approval:

  • Stock exchange-listed investment trusts
  • Commercial property
  • Gilts and bonds
  • Stocks and shares
  • UK government bonds
  • Foreign government bonds
  • Financial Conduct Authority-recognised Open Ended Investment Companies (OEICs)
  • Bank deposit accounts
  • Exchange-traded funds
  • Real estate investment trusts

If you have several pensions, you can consolidate all your different ‘pots’ into one SIPP, making your pension easier to manage.  Although you can choose the underlying investments, you don’t have to make these decisions on your own. In fact, unless you are an experienced investor, you may prefer to seek advice from a professional adviser regarding the available options – such as our team here at Blacktower.

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What are the different types of SIPP?

There are three options available to you. Each provides different benefits and what will work for each individual investor will depend entirely on his or her requirements:

  • Full SIPPs – The standard option for most investors, this model provides the greatest freedom and flexibility in relation to the variety of possible investment types. It can be particularly appealing to retirement savers with larger pension funds (typically for funds in excess of £150,000).  However, they also have the highest charges.
  • Low-cost SIPPs – While still offering a broad degree of investment options, this low-cost alternative doesn’t allow for investment into offshore funds, unquoted shares, or property ownership. Lower-cost SIPPs are ideal for people with more modest pension pots as they generally have lower charges.
  • Hybrid SIPPs – This last option is most commonly offered by insurance companies and comes with many of the same benefits as above. However, this type requires you to have paid a significant amount of money into the insurer’s own funds in order to choose your own investment options,

What are the advantages of a SIPP?

SIPPs, as with many other types of pension, are a highly tax-efficient way to save for retirement. The benefits are:

  • They are entirely free of UK income tax and capital gains tax
  • Up to 40% tax relief is available on contributions up to £60,000 per year.
  • If you own commercial property you can sell it to your SIPP, thereby releasing funds which can then be reinvested.
  • You can take 25% of your fund as a lump sum, often referred to as tax-free cash – but see the comments below regarding the Lifetime Allowance.  A cash sum can be particularly useful if you have a particular project or capital expenditure in mind when you retire. 
  • You can pass the fund on to your beneficiaries on your death free of Inheritance Tax (IHT).  They can then choose to:
  • Take the whole pension fund as a lump sum
  • Draw a continuing income
  • Purchase an annuity or
  • Leave it invested.

The tax treatment of the above options will vary depending on your age at the date of death and other factors.  

A SIPP can be left to any beneficiary you choose, including a charity, and can be divided between multiple beneficiaries. If the beneficiary does not withdraw the entire fund before their death, it can be passed on again and the fund continues to provide benefits for future generations.

If you are no longer UK-resident, you can open an ‘International SIPP’ which can cater for payments and investments in other currencies to protect you from exchange rate fluctuations.

Finally, it’s also important to consider that when you start to take any benefits from your fund (known as ‘crystallising’ your pension), you may very well be subject to the Lifetime Allowance (LTA) – see below – regardless of your country of residence.

How to set up a SIPP

You can set up your SIPP in one of two ways:

  • You can approach a SIPP provider directly
  • You can ask a financial advisory company, such as Blacktower – they can recommend the best provider and put together a comprehensive investment strategy that best suits your needs.

Regardless of which option you choose, once you’ve found your chosen provider, you’ll need to consider the following things before setting up your fund:

  • Decide which of your current pension funds you’d like to keep, and which ones you’d like to move into your SIPP (it’s important to bear in mind that some pensions are better suited to remaining where they are).
  • Determine how much risk you’re willing to take. Higher risk investments can mean greater rewards over time, but low risk investments may not grow enough to provide an adequate pension.
  • Identify where you’d like to invest your funds
  • Choose who will manage your pension – it could be you, or it could be your financial adviser.

How to pay into a SIPP

As with standard pensions, paying into a SIPP is relatively easy; you can either transfer over other pension funds, pay in a lump sum, or set up regular contributions. You can even do all three if you prefer.

If you have income, you can contribute 100% of your gross earnings into your SIPP up to a limit of £60,000 in any one tax year.  However, if you earn more than £260,000, the amount you’re allowed to contribute will be reduced to £1 for every £2 earned, until your tax-free limit reaches £10,000.

Even if you have no earnings, you can still contribute up to £3,600 gross per tax year while still receiving basic tax-rate relief.

How do you take money out of a SIPP?

You can withdraw money once you reach the age of 55 – although this will change to age 57 in 2028. 

Withdrawing money is relatively simple. You can take 25% of your entire fund as a tax-free lump sum.  Whilst it might not be subject to tax in the UK, this may not be the case if you are resident in another country and you should seek tax advice.

You could then use ‘Flexible Access Drawdown’ (FAD) for the rest. This means that you leave the balance of the fund invested in your SIPP (with the potential of further growth) and draw income from it as and when needed.

Alternatively, you could buy an annuity, which gives you a guaranteed income for the rest of your life.

How are SIPP funds managed?

A SIPP pension scheme is typically managed through a secure online account that gives you access to a dashboard that enables you to buy and sell your investments, should you choose to do so.

If you’re an expat, managing your fund may not be straightforward compared with a UK resident.  Unless you’re an expert in financial matters, it may be better to appoint a fund manager to look after your fund.

SIPP fees to consider

There are several fixed fees you’ll need to consider before deciding if a SIPP is right for you. These fees can include all or some of the following, and will likely differ in price between providers:

  • Set up fees
  • Ongoing charges – these typically include transaction fees each time you make an investment transaction
  • Annual management fees – not all providers charge these – some have a flat fee, others charge a percentage of the fund value.
  • Exit fees – if you choose to transfer your pension to another provider, you may have to pay fees.
  • Flexible Access Drawdown fees – these are fees that may be payable if you switch to FAD.

How many SIPPs can I have?

There is no limit on the number of SIPPs you can have. However, if your goal is to have one simplified arrangement, there would be no point in having multiple SIPPS all with different set-up fees and other charges. 

The Lifetime Allowance (LTA)

There is no limit to the size of pension fund that you can build up.  However, until early 2023, the Lifetime Allowance (LTA) imposed a limit of £1.73m on the total ‘tax-privileged’ amount you could hold in your pension fund.

Any fund in excess of this amount would be taxable at 25% (or possibly 55% if you took the excess amount as cash). 

The Spring Budget of 2023 abolished the tax on any excess funds, with the LTA itself due to be abolished in April 2024.  Until that time, the cash you can take from your fund is subject to an overall maximum of 25% of the current LTA of £1.073m.  This means that until such time as the LTA is abolished, a monetary cap of £268,275 will apply. 

However, the Labour Party has said that if it wins the next General Election, it will reintroduce the LTA.  This means that your pension fund could be in excess of a reintroduced LTA at some time in the future.

Is a SIPP right for me?

Whether or not a SIPP is right for you will come down to your own financial situation but it is certainly well-suited to those who understand the financial markets or have the time to research and manage their investments.

However, it’s important to remember that investments can go down as well as up, so you need to be prepared for the financial risks if something goes wrong.

If you choose to seek help from Blacktower, our team of advisors will help you mitigate this risk.

Here at Blacktower, we’re experts in helping our customers get the most out of their finances, both at home and abroad. Get in touch today to see what pension  advice we can offer.

This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, they are subject to change and we are not responsible for any errors or omissions.


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