What Is A SIPP?

SIPP stands for Self-Invested Personal Pension. As by the name, this specific kind of account is for those who wish to create a private pension. This kind of pension account can be invested into along side a work place pension or for those who are self employed. Anyone can invest in a SIPP whether they are working or not, but conditions apply.

What is a SIPP?

A SIPP is a pension ‘wrapper’ that allows you to save, invest and build a retirement fund for later life. A SIPP is a type of personal pension and works in a similar way to a standard workplace pension.

The main difference between a workplace pension and a SIPP is that you normally have a lot more flexibility with the types of investments you can choose, depending on the broker you use.

How are SIPPs different from other accounts?

With a SIPP you can choose and manage your own investments or pay for an authorized financial advisor to help you pick your investments.


Depending on the broker, you have access to a much wider array of investments than the typical workplace pension, which normally have a select few funds to pick from.

As an example Nest pension, which is one of the main providers for the opt out pension service, offers 7 different funds. Compare the 7 funds on offer from Nest to a wider range off assets which you can invest into and control such as:

  • Company Shares (UK & Overseas)
  • ETFs/Funds
  • Investment trusts
  • REITs

Do you get tax relief on contributions to a SIPP?

Contributions to a SIPP qualify for tax relief, this means that any contributions are topped up by the government.

Any contributions into a SIPP received basic-rate tax relief at source, which is collected by the SIPP provider and deposited into your account.

For example, if you contribute a lump sum of £1,000 into your SIPP, you will receive a tax relief of £250 from the government, making the total amount of money in the SIPP £1,250.

If you are a higher rate tax payer (40%), you can claim additional tax relief up to £500 through your self assessment tax return.

If you are an additional-rate tax payer you can claim up to £625 via the self assessment tax return.

For SIPP investors who are Scottish residents, the tax relief works slightly differently.

How much can you invest into your SIPP?

With a SIPP you can invest up to 100% of your annual income to your SIPP each tax year, up to a maximum annual allowance of £40,000.

The £40,000 allowance includes personal contributions, employer contributions and tax relief.

If you do not have any earnings in a tax year, you can still contribute a maximum of £3,600. This allowance includes tax relief.


£2,880 (personal contributions) + £720 (tax relief) = £3,600 allowance.

Can I have a SIPP and a workplace pension?

Yes, you can pay into both a SIPP and a workplace pension. You can view a SIPP as an additional retirement account.

If you have not maxed out your employer matched contributions to your workplace pension its normally better to increase the amount you are paying into a workplace pension.

If you are thinking of setting up a SIPP so you can make extra contributions outside your workplace pension, its a good idea to compare costs & charges, as it may be cheaper to contribute to your existing workplace pension.

What’s the benefits of a SIPP?

There are many benefits to a SIPP, mainly the tax relief on contributions, giving your investments an extra boost. Here is a list of benefits:

  • Tax efficient – government will match your savings with tax relief.
  • Guaranteed 20% tax relief – more if a higher or additional tax payer.
  • Flexibility of when or how much you invest into your pension.
  • Control over the investments chosen.
  • SIPPs being a versatile investment vehicle – hold a range of defined assets.
  • Can keep investing into a SIPP till the age of 75.
  • Up to 25% of your SIPP can be withdrawn tax free.
  • Flexible choice of withdrawal of funds – regular income, annuity or series of lump sums.

What are the disadvantages of a SIPP?

A SIPP is an fantastic investment vehicle but it does come with limitations and disadvantages such as:

  • Limits of how much tax relief you can get.
  • Limit of £40,000 per year allowance.
  • A lifetime limit of £1,055,000 applies across all pension funds.
  • Risk of paying extra fees for SIPP wrapper and underlying investments.
  • Self-managing investments could increase risk of higher losses.

Early withdraw from a SIPP

Under current rules by HMRC, you will be taxed a rate of 55% on any unauthorised withdrawals from your pension, meaning you could lose more money than you put into your SIPP. Most SIPP providers will unlikely allow you to access your pension before the age of 55.

Cases where you can withdraw early from a SIPP are:

  • Poor health/serious medical condition.
  • Given less than a year to live.
  • If you have a protected retirement date specified in your pension plan.*

*The pension plan would have to been granted before 6th of April 2006.

When can I access my SIPP?

You can access your SIPP retirement pot at the age of 55 (rising to 57 in 2028). When withdrawing from a SIPP you have many options, your main ones are:

  1.  Keep your investments where they are – save for later.
  2.  Use your pension to purchase a lifetime or fixed term annuity.
  3.  Take a 25% lump sum tax free and purchase an annuity.
  4.  Use your pot to give you a flexible retirement income – pension drawdown.
  5.  Take a number of lump sums – First 25% tax free.
  6.  Take your pension pot in one go
  7. A mixture of any of options – choose a combination of the above.

Retirement accounts different than a SIPP?

If you are interested in retirement accounts, another option to the SIPP is a Lifetime ISA.

The LISA account has two uses, first you can use it for a deposit for your first house and secondly you can use the account as a retirement fund, along side a workplace pension, SIPP or both.

There are limitations to this account such as you have a limit of £4,000 a year but comes with a 25% government bonus, topping up the account to £5,000 a year of you max out the allowance.

Just like a SIPP there are age rules for opening an account and withdrawal, early withdrawal fees and more.

Check out our article on ‘who is eligible for a LISA‘ to find out more information.

Is a SIPP better than a ISA?

Though both the ISA and SIPP have great tax benefits, overall the SIPP wins for long term investing. The government top up of at least 20% makes it a clear winner, even more so if you are a higher rate tax payer.

Over a 30 year time line the SIPP beats the ISA by a fair margin, making the SIPP the most tax efficient way of investing for long term growth.

Vanguard SIPP vs ISA
Taken from Vanguard

“As you can see, thanks to the tax kickback the £1,200 paid each year into a SIPP is bumped up to £1,500, so that by the time you complete 30 years you have more than £195,000 compared with just over £156,000 in the case of the ISA.” – Vanguard

Because of government tax relief of 20%, effectively a £100 deposit into a SIPP turns into £125. While with the ISA you get no tax relief.

SIPP vs ISA – Flexibility

While a SIPP is a clear winner in terms of total gains, the ISA is a much more flexible investment vehicle.

While a SIPP is souley an retirement account, locking your money away till 55, the ISA allows you to save for a multitude of goals without locking your money away. The sacrifice is the tax relief.

A ISA can provide a tax efficient home for your savings/investments for other life goals other than retirement.

If you have retirement on your mind, the SIPP is only one of many vehicles of choice. The ISA is another account which can be used if you are playing with the idea of early retirement. Using an ISA you can bridge the years between when you wish to quit work and the age off access to your retirement pots or even use the ISA to complement your retirement savings.

If you are interested in pensions they you may have the question of ‘What is a triple lock state pension‘, you can find the answer here:

What is state pension triple lock?


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