A Beginner’s Guide to SIPPs

Since the introduction of pension freedoms in 2015, people have had more control of their retirement savings. Where traditional pensions do not offer flexibility over where your money is invested, a “self-invested personal pension” or a SIPP is a type of pension that lets the investor take control of their retirement fund.

It is possible for anyone to start a SIPP. SIPPs are commonly started by business owners, experienced investors, the self-employed or those looking for flexibility with their retirement savings provision.

There is also a “small self-administered scheme” or a SSAS, which is a small occupational pension scheme, typically arranged by the directors of a business.

A SIPP and a SSAS both have their benefits for those looking to manage their pension investments, but it will be dependent on individual circumstances as to which pensions scheme is suitable.

This article explains what a SIPP is and how it works.

What is a SIPP?

A SIPP is a self-invested personal pension fund which gives you the flexibility to take control of the investments. The principal difference between a SIPP and other types of pension is the flexibility of investment choice – rules governing contributions and tax relief rules are identical, as are the options available for drawdown when you reach retirement.

How does a SIPP work?

As with other pensions, you can pay into a SIPP as and when you like, and under 75s (who are also tax resident in the United Kingdom) qualify for top-up tax relief. Automatic tax relief of at least 20% is applied to money paid in and more can be claimed if you are a higher rate taxpayer. Money within the SIPP then grows free from UK income and capital gains taxes.

Unlike traditional pension schemes, a SIPP enables you to take control of where your money goes and how it grows – the wrapper allows you to invest in a multitude of different ways. A SIPP is basically a do-it-yourself pension. A SIPP is a good option for those wanting to consolidate existing pension pots into one place or for those wanting to keep their money invested after they retire so they can continue growing their investment and drawing an income from it.

SIPPs give you the option of ready-made investment portfolios or you can choose your own individual investments. These can include funds, shares, property and trusts. The flexibility of a SIPP gives you the choice to diversify and change your investments.

You are able to make withdrawals from your SIPP when you turn 55 (this will increase to 57 from 2028) even if you are not yet retired. A quarter or 25% of the pot can usually be taken tax-free. The rest of the withdrawals from the SIPP are taxed as income.

Different types of SIPP

Full SIPPs offer the greatest choice of investment type, but they also levy the highest charges. Full SIPPs are best suited to people with relatively large pension funds. Full SIPPs are geared towards proficient investors who require a high level of sophistication, such as investing in commercial property.

Lite SIPPs offer a diverse range of investment options but don’t include direct ownership of property, offshore funds or investing in unquoted shares.

DIY SIPPS are offered by investment platforms geared towards those with smaller pension savings to invest. They are normally purchased on a non-advised basis which means nominal set-up charges.

Can you have a joint SIPP?

No. A SIPP pension wrapper consists of many sub-funds that are ring-fenced for each individual SIPP member. This means that a joint SIPP is not possible, but it is possible and indeed common to have more than one SIPP running concurrently and linked together in a ‘Family SIPP’ for all members with any income split by percentage of contribution to a global investment pot.

What about Family SIPPs?

It is possible to pool together two or more individual SIPPs for the mutual benefit of each SIPP, enabling use of different asset types across each separate fund. This arrangement is known as a Family SIPP. Pooling SIPPs together under one umbrella means that cash can be made available for further long-term investments in different asset classes (e.g. where one SIPP is heavily invested in property and another is mainly in stocks and shares (that have more liquidity)).

What happens to a SIPP when you die?

When you die, your SIPP can be passed to your beneficiaries, in most cases free from inheritance tax. You can leave your SIPP in your will and if you die before you reach 75, your beneficiaries can choose to take the contents of your SIPP as a cash lump sum or leave it invested.

What are my SIPP investment options?

Your attitude to taking risks, familiarity, and appetite for making investment decisions will determine how you choose to build your investment portfolio or SIPP. It is possible to hold cash in your SIPP while you decide where to invest, which can take some pressure off making investment decisions because you have already received tax relief on your SIPP pension contribution.

The wide range of investment options in SIPPs can make a huge difference to the performance of your pension. How your investments perform have a large impact on the eventual size of your SIPP. Investment options include collective investment funds (unit trusts, OEICs, insurance company funds and others), stocks and shares (UK, overseas, government, bonds and others), cash, commercial property and land. Diversification of your SIPP can ensure maximum growth of the pot, balancing peaks and troughs in performance across different investment classes.

How does a SSAS differ to a SIPP?

A Small Self-Administered Scheme or a SSAS is a small occupational pension scheme, typically arranged by the directors of a business. It is often regarded as the ‘limited company equivalent’ of a SIPP. There are limits to the number of members of a SSAS. The SSAS members also act as trustees of the fund which can lend money back to the sponsoring business which can, in some cases, reduce the company’s Corporation Tax burden.

A SIPP is open to anyone and the SIPP provider acts as the trustee rather than the member. A SIPP member has their own SIPP account and it is not possible to lend back to a sponsoring business because there isn’t one.

How to start a SIPP?

You can start a SIPP alongside existing pensions such as a stakeholder pension provided you ensure that you stay within the overall contribution allowances. Providers allow you to set up monthly payments and change your contributions whenever you like.

Another option is to transfer an old pension or number of pensions into a SIPP. It is worth reviewing your personal pensions as some have high fees and may suffer from poor investment performance. You can transfer a pension into a SIPP at any age, even if you no longer live in the UK.

Solicitors are not authorised to provide investment advice on SIPPs or SSAS. However, if you require advice legal advice in respect of SIPPs, SSASs or property-related pension transactions, please contact our Joe Haigh, Caroline Isherwood or Robert Kilgour