For those making important investment decisions to ensure their financial security in retirement, a Self-Invested Personal Pension (SIPP) is an increasingly popular option.
What is a SIPP: Summary Table
|⚖️️ A SIPP stands for?||Self-invested Personal Pension|
|❓ Is a SIPP a type of personal pension?||Yes, it is|
|😎 What are the tax benefits of a SIPP?||There is a 25% tax relief from the government on each contribution|
|⚠️ The SIPP annual allowance?||100% of your total salary or the annual allowance of £40,000 per tax year|
But what exactly is a SIPP, and how does it differ from more traditional pension schemes? This SIPP guide will tell you everything you need to know.
What is a SIPP? A SIPP is a type of personal pension that gives investors more freedom, flexibility, and transparency over their retirement pot.
You can invest in a wide range of investments through a SIPP, although it’s rare that a single pension platform will allow you to invest in all types. This list includes:
- Stocks and Shares
- Exchange-Traded Funds
- Investment Trusts
- Bank Deposit Accounts
- Commercial Property
- Real Estate
- Offshore Funds
Many hands-on investors prefer to invest in a SIPP for the control over what their pension is invested in. But it takes a lot of time, skill, experience, and extra money to successfully manage a DIY pension portfolio for your retirement goals.
If you’d rather the experts take on the full-time job of this decision-making on your behalf, it’s possible to get investment advice and guidance on fully-managed pension portfolios that adapt to reflect your changing financial situation as you get closer to retirement.
The Moneyfarm Pension is an excellent option if you want to make confident, stress-free investment decisions to build a more financially secure future in retirement.
The value of your SIPP depends on your pension contributions, how long you’re invested for, your investments perform, and management fees.
Different types of SIPP
There are different types of SIPPs, and each type is beneficial to different kinds of investors. The types include Full SIPP, Lite SIPP, Deferred SIPP and Hybrid SIPP. However, this article will focus on two main types.
A full SIPP offers the broadest range of investment options, and it is targeted toward experienced investors. It is also suitable for people with larger pension funds. This type of SIPP is completely unrestricted, so all investments (vanilla and non-conventional) and activities are acceptable, and it comes with a high level of support from the authorised and regulated SIPP provider.
Sometimes, a full SIPP comes with bespoke investment arrangements, from direct investments in unlisted equity shares, commercial property, offshore and physical gold bars to borrowing from SIPP to finance a business. Because of this, full SIPPs often charge eye-watering fees for the privilege.
DIY or Lite SIPPs
DIY or Lite SIPP is sometimes called a ‘low-cost SIPP’ or ‘simple SIPP’. This type of SIPP offers a wide range of investment options and is geared toward people with smaller pension funds.
Lite SIPP has fewer investment options as it does not allow direct investments in unlisted shares, commercial property, offshore funds or other unconventional investment options.
A lite SIPP is also called a DYI (do-it-yourself) SIPP because self investing is involved. You are expected to manage your funds yourself with little support. However, some financial institutions offer ready-made portfolios for investors who hate the DYI part.
Moneyfarm provides ready-made SIPPs. We offer a range of portfolios based on your risk tolerance level.
The fees are cheaper than a full SIPP but can also be complicated. The lower fees make it more accessible to investors, making it ideal for retirement planning.
Tax benefits of a SIPP
There are generous tax benefits available to you when you invest in your SIPP and when you take your money out in retirement.
You can get tax relief on your pension contributions relative to your income tax band. For basic rate taxpayers, this is essentially a 25% bonus from the government that’s added to each contribution. It’s even more for higher and additional rate taxpayers, although you have to claim the rest through your self-assessment tax return.
This means that investors only need to contribute £8,000 for a £10,000 contribution. Not only does this help investors save for retirement, but it can help maximise your returns through compound interest – this is where the returns your money generates are reinvested and earn their own return. The more money you have invested, the greater this impact on returns.
There are also tax benefits to be had when you’re in retirement. Once you know how to retire at 55, you can choose to take 25% of your pension savings tax-free. It’s worth remembering that the UK retirement age raises to 67 from 2028. Also, tax benefits apply as long as you don’t exceed the pension lifetime allowance.
You decide what to do with your lump sum, but once it’s gone, it’s gone.
While it’s a popular option with those wanting to pay off their mortgages, travel the world, or help their children get on the property ladder, you might not require a big lump sum.
Instead, you can choose to take your tax relief through your withdrawals. As you won’t have taken your tax-free lump sum, this is known as an uncrystallised funds pension lump sum (UFPLS).
If you have any questions about the options available to you when accessing your pension, Moneyfarm’s Free Drawdown Service can help empower you to make confident, stress-free decisions about your retirement income.
SIPP investment options
As we’ve already discussed, a SIPP offers more flexibility and transparency over what you invest in through your pension. So whether you decide to manage your pension investments yourself or want an experienced portfolio manager to make the investment decisions on your behalf, you should consider some important things to put your pension in the best position to reach your retirement goals.
- Your investments should reflect your financial situation and time horizon
To reach your financial goals, it’s important that your investments reflect your financial situation and time horizon. The longer you have to invest, the more risk you can take with your investments, which increases the potential for return – although your investments can also fall in value. But by building your portfolio to suit your investor profile, you’re more likely to make better investment decisions that help maximise your returns.
- Have access to advice and guidance when you need it
It’s important that your pension is built to suit your goals and continues to reflect your financial situation until you reach retirement. So, whether you’re unsure you’re on track to reach your goals, what to do with a lump sum or are struggling to understand the performance of your portfolio, it’s important you have access to advice and guidance – should you need it. Whether it’s digital or in person, this helps you live with the confidence that you’re making the right investment decisions with your pension.
- Your investments should be globally diversified
By spreading your money across a wide range of investments and geographies, you can more effectively manage risk in an increasingly complex and uncertain world. This allows you to take advantage of global opportunities whilst minimising your exposure to certain risks.
- Make sure you find good value
People often pay too much for pension portfolios that are unsuitable or fail to deliver real value. At Moneyfarm, we strive to keep costs low, simple and transparent to empower our customers to make the best investment decisions for their financial situation, keep more of their money and maximise returns over the long term.
- Your pension should be accessible, convenient and transparent
It’s important you know exactly how much you have in your pension, how it’s performing, how much you’re paying and what you’re invested in – whenever you want. Gone are the days where you wait for your annual statement to see how much you have in your pension. Thanks to more sophisticated money management apps, saving for your retirement is now convenient, engaging and simple. This puts you in control and ensures you’re given the right tools to reach your retirement goals.
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How much do SIPPs cost?
Now that we know the answer to ‘what is a SIPP?’ we need to know how much a SIPP costs. The cost of a SIPP will depend on the type of SIPP and the SIPP provider. A full/bespoke SIPP is expensive, and fees can run into thousands of pounds per year. DIY/lite SIPPs are the most affordable and most popular.
Sites with excellent user experience with access to comprehensive research tools and good customer service will charge more than other basic platforms. Also, the size of the pension fund can affect the fee.
When retirement planning, you should be aware of key costs, including set-up fees, annual management fees, deal/trade costs for buying/selling shares and exit fees if you change providers. In addition, it would be best to consider the drawdown costs of withdrawing money out of your pension when you’re nearing retirement.
Always make sure the SIPP fees do not eradicate your profit. For example, if the total fees per year are 4%, your SIPP investments must earn more than 4% to realise a profit.
Personal pension vs SIPP
SIPP is a type of private pension. SIPP and personal pension have identical tax relief and pension contribution rules. However, the key differences between a personal pension vs SIPP are the investment options, flexibility, and fees.
A Self-Invested Personal Pensions (SIPP) gives investors more flexibility and a wide range of investment options when it comes to deciding what they want their pension savings to be invested in.
With traditional personal pensions, you will typically choose between a range of pre-determined funds, and there may not be a lot of investment options available.
The decision to invest in a SIPP or a personal pension depends on how broad you want your investment portfolio to be.
Regardless of your choice, ensure that your SIPP or personal pension provider is authorised and regulated by the Financial Conduct Authority (FCA) to avoid losing your pension savings to scammers.
Should I open a SIPP?
While a SIPP is a great option for those who want added flexibility, transparency and control, it’s important you understand the pros and cons of a SIPP before investing in one.
Why you should open a SIPP
- Consolidate your old pensions into one place – This can make your retirement savings easier and cheaper to manage.
- If you want more control – Whether it’s over what you’re invested in, when you invest or want to understand how your pension is performing
- If you want more transparency – Understand what you’re paying at any moment and keep on track with your goals
- If you’re looking for better value – Whether you’re investing in a DIY portfolio or a fully-managed one, a SIPP can offer better value
- If you want a more convenient pension plan – With most providers like Moneyfarm, you can manage your retirement savings from your phone, anywhere and anytime
- If you’re looking for more flexibility of contributions – Whether you want to pay in lump sums or set up a direct debit to maximise your annual allowance
- More control in retirement – Decide how you access your pension savings with the opportunity to keep your money invested to maximise your retirement income
Why you might not want to open a SIPP
- You have employer contributions to your current pension – you may lose benefits to investing in your workplace pension (companies are legally required to pay at least 3% of an employee’s salary into a workplace scheme) if you invest in a personal SIPP instead.
- You’re unsure you want more control – While DIY investors need to be comfortable with managing their investments, wealth managers like Moneyfarm offer digital investment advice on fully-managed pensions, meaning that all you need to decide is when and how much to invest. Your pension is managed for as long as you invest with us and automatically adjusts as you get closer to retirement.
- Exit fees – hidden charges like exit fees can be a real dent in the value of your pension. Make sure you understand all costs and charges before choosing or switching pension providers. At Moneyfarm, we keep costs simple, so you always know what you’re paying.
Transfer your old pensions to the Moneyfarm SIPP
If a self-invested personal pension is right for you, you might want to consider consolidating your old pots into one place.
As the average Brit has over 11 different jobs in their career, they probably have multiple different pensions to go with it. If you’re not exactly sure what pensions you have, you can use the government pension tracing scheme set by the Department for Work and Pensions.
There are a number of reasons why you might think about transferring your pension:
- You want a different pension service from the one your provider is offering.
- You want to consolidate your old pensions to simplify your plan.
- You want to pay less in fees.
- You want a higher income.
- You’re moving abroad and want a local scheme.
- Some older schemes may not offer certain freedoms, like UFPLS.
It can be difficult to keep on top of your pension savings. Having your pensions in several different places can make this more confusing. In addition, if you don’t know what you’ve got, it’s nearly impossible to understand whether you’re on track to reach your retirement goals. To help you with this, you can also discover how much you should be saving for retirement using a pension calculator.
Consolidating your pensions into one place makes it easier to see how your investments are performing and know precisely what you’re paying in fees at any time.
If you’re consolidating your old plans into a personal pension, make sure your portfolio is suitable for your investor profile and time horizon. This will put your money in the best position to grow for the retirement income you need.
And if you’re not on track to get the retirement income you were hoping for, you can also easily identify and make the necessary adjustments you need to get there.
The industry is more flexible than ever before, allowing consumers to make the adjustments they need to get the retirement income they want. But you’ll need to check whether you’ll pay a transfer fee to move your money to a new pension pot or whether you’ll lose any benefits like a guaranteed annuity rate before you do anything.
Defined benefit transfer
- The FCA believes defined benefit pensions offer more security than a personal pension, as they offer you a guaranteed income throughout retirement and benefits to a spouse or partner if you die.
- These schemes are often index-linked to offer a form of inflation protection throughout retirement.
- Not everyone with a final salary pension can transfer it.
- You’ll need to get a ‘cash equivalent transfer value’ (CETV) from your pension provider before you transfer to value how much your pension is worth and whether you should transfer to a personal pension.
- There are pension transfer calculators available that calculate whether your CETV represents good value.
- If your pension is worth over £30,000, you’ll need to consult with an Independent Financial Adviser before you transfer, otherwise many personal pension providers won’t accept you under regulation.
Defined contribution transfers
- As defined contribution (DC) schemes rarely offer any guarantees, it’s easier to transfer your DC pensions.
- You can find your pension transfer value from your annual statement or from your pension provider.
- Most company pension plans will allow you to transfer to a personal pension or other workplace schemes without speaking to a financial adviser, although this isn’t recommended if you’re unsure.
- There can be some fees attached to transferring set by other providers, so make sure you’re aware of all charges before you transfer, as this could significantly impact larger pension funds.
Do I get tax relief on SIPP?
Yes, SIPP is tax-efficient but you need to be aware of the tax rules and implications based on your individual circumstance.
Investments in a SIPP grow tax-free; there is no income tax and capital gains tax. Also, the government gives you a pension tax relief based on your income tax rate.
The SIPP tax relief rates for England, Wales and Northern Ireland are different from the rates in Scotland.
Tax relief rates for England, Wales and Northern Ireland:
- Basic Rate: 20%
- Higher Rate (over £50,270 pa): 40%
- Additional Rate (over £150,000 pa): 45%
Tax relief rates for Scotland:
- Basic Rate: 20%
- Intermediate Rate: 21%
- Higher Rate: 41%
- Additional Rate: 46%
Please note that the full tax relief is based on earnings and annual pension allowance. You can save up to 100% of your total salary or the annual allowance of £40,000 per year into a SIPP. Income above £150,000 will result in a lower annual allowance.
Making sure you plan for retirement in the best way for you and your family can be difficult. If you need any help, talk to an independent financial adviser and be sure to read our pension guide.
Can I have a SIPP and a personal pension?
A SIPP is a type of personal pension, and you can simultaneously have a SIPP and any other type of personal pension. Just be aware of your annual pension allowance when spreading your pension contributions.
Can I have a SIPP and a workplace pension?
Having a workplace pension does not stop you from having a SIPP account. You can also make pension contributions to the SIPP and workplace pension. However, the pension annual allowance limit applies across all your retirement accounts.
Can I transfer my workplace pension to a SIPP?
You can definitely move your workplace pension into a Self Invested Personal Pension (SIPP), but it is worth considering whether one will be better suited for your needs. Also, check out the difference in benefits before initiating a transfer.
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