What Is a SIPP and How do They Work? | SIPPs Explained (2024)

FAQs

What Is a SIPP and How do They Work? | SIPPs Explained? ›

A self-invested personal pension, or SIPP, is a defined-contribution retirement plan offered to taxpayers in the United Kingdom. SIPP participants defer a portion of pre-tax income where they can invest in stocks, bonds, and ETFs, among other approved assets in a tax-advantaged manner.

Investment risk: The value of your investments can fall, leading to potential losses. Inflation risk: The growth of your SIPP may not keep pace with inflation, reducing the real value of your savings. Longevity risk: The risk of outliving your pension savings if you draw down too quickly or live longer than expected.

You can choose to take a flexible income as and when you need it. Or you can opt for a secure income for the rest of your life if, for example, you don't want to keep your pension invested in retirement. If you're looking to take control of your retirement savings, a SIPP is an excellent option.

Use your pension pot to give you a flexible retirement income. This is also known as pension drawdown. You can take the amount you're allowed to take as a tax-free lump sum – normally up to 25%. You can then use the rest to give you a regular taxable income.

SIPPs offer greater control and flexibility over investments, including asset options like stocks, bonds, and exchange-traded funds (ETFs). Personal pensions provide simplicity and convenience, with investments managed by the pension provider.

FSCS protection is the main form of security you'll have for your SIPP. You'll be covered under the scheme if a SIPP provider you've invested with fails, but it will only pay out if the company is unable to compensate you on its own.

If a SIPP provider goes bust and you aren't able to transfer your pot to another provider, you'll be able to claim compensation from Financial Services Compensation Scheme (FSCS). In most cases, you'll be eligible to receive up to £85,000 of your savings back.

You can withdraw up to 25% of your SIPP funds tax-free, but any additional withdrawals are taxed at your marginal tax rate.

Accessing your SIPP FAQs

You can access your pension in three different ways: flexible retirement income (pension drawdown), taking lump sums or guaranteed income (annuity). Find out more about how you can access your money.

You can put 100% of your income into a SIPP each tax year up to the maximum of £60,000, which includes personal contributions, employer contributions and tax relief. Anything above this amount will not be eligible for tax relief.

What is the age 75 rule? ›

What happens to your pension when you die over 75. HMRC pension rules confirm that once you reach age 75, your beneficiaries will be taxed after you pass away, and they will start taking benefits from your pension.

One of the most flexible types of pension, a SIPP lets you select and manage the investments in your pension pot yourself. You can open a SIPP alongside your existing workplace or other personal pensions – and in doing so, can open up a range of investments that may not be available to you via other schemes.

Transferring your pension to a SIPP can offer significant benefits, including greater control over your investments and potential tax advantages. However, it's crucial to carefully weigh these benefits against the risks and costs involved.

As your SIPP withdrawals are just another source of income for a tax year, your tax may be spread across different bands. Your SIPP provider will deduct tax automatically under PAYE before paying withdrawals.

The specific risks you should be aware of with SIPPs include potential issues such as market volatility, interest rate shifts, and inflation. The risks associated with SIPPs include: Investment risk: The value of investments can fall as well as rise, and you may lose some or all of the money you've invested.

Political and economic uncertainty, disease as well as conflict, affect financial markets and cause them to rise or fall. But markets do recover after a fall and because your pension is a long-term investment, any dips are likely to be short-lived.

It isn't illegal to take money out of your SIPP early. However, pensions are retirement savings products and, as such, the tax penalties for taking money out of your private pension early are very high. Under current rules, HMRC will charge tax at a rate of 55% on any unauthorised pension withdrawal.