With a self-invested personal pension, you might be able to choose where the money in the pot is invested. Investing in a SIPP might allow greater freedom to choose from a wider range of investments than workplace pensions. With a SIPP you might be able to invest in most collective investment funds, shares and investment trusts.
Like other pensions, SIPPs have tax benefits:
It’s important to remember that as with all investments, the value of your SIPP could go down as well as up and you could get back less than you invest.
Tax treatment depends on your individual circumstances and all tax rules can change.
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With a self-invested personal pension, you’re in control of making the investments. You can either do this yourself if you know where you want to invest, or you can use a financial adviser qualified to invest on your behalf.
Even if retirement seems a long way off, if you’re self-employed or don’t have access to a workplace pension scheme, it’s never too soon to think about how you will support yourself when you stop working.
Many self-employed people choose to invest in a SIPP for this reason. You can either make regular payments into your SIPP or make larger payments as a lump sum. There’s no limit on how much you can invest in a SIPP each year. However, you’ll only get tax relief on the first £60,000 or 100% of your earnings, whichever is lower. If earnings are below £3,600, a contribution of £3,600 after tax relief can be paid.
When you turn 55, you’ll normally be able to receive 25% of your SIPP investment as a tax-free sum. From April 2028, this age will change to 57. The remaining funds can be:
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You can set up a SIPP alongside an existing workplace pension if you have one. Usually, it’s most cost-effective to pay into your workplace pension first, as any employer contributions can boost the total in the pension.
Setting up a SIPP can be a way of spreading your contributions. But make sure you understand the charges involved, as it could be more cost-effective to stick with one pension.
If you have several different workplace pension schemes, you might consider moving them all into one SIPP to consolidate them and simplify things. Whether this is possible will depend on the type of workplace pension scheme you have. It’s a little more complicated for defined benefit pension schemes than for defined contribution pensions.
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When you retire, you’ll be able to take up to 25% of your SIPP investment as a lump sum without paying tax.
The rest of your SIPP will be subject to income tax on amounts you take out. This applies whether you take out the money as a lump sum or withdraw monthly amounts. Bear in mind your personal allowance for income tax is renewed every year, so it’s a good idea to spread your withdrawals to make use of this.
If you’re new to investing, setting up a SIPP can seem a bit daunting as there’s a lot to think about. First, you’ll need to choose a SIPP provider. A financial adviser can help you consider things like:
Once you’ve decided on a SIPP provider, you can open the SIPP account and transfer in any existing pensions if you’re consolidating other schemes. You’ll need to decide when your contributions to the SIPP account will be made and how much they’ll be. If you’re the director of a limited company, you can either pay these personally, or as ‘employer’ contributions through your company, which could be more tax-efficient.
