By WatkinsonBlack
Pensions are often associated with workplace schemes where contributions are invested on your behalf with relatively limited involvement. A Self-Invested Personal Pension, or SIPP, takes a different approach, offering considerably more choice over how retirement savings are invested.
For people prepared to take a more active interest in their pension, a SIPP can provide valuable flexibility. However, that flexibility comes with rules around contributions, tax relief and eventually accessing the money.
What makes a SIPP different?
A SIPP is essentially a type of personal pension. Contributions are made into the pension, tax relief is available subject to the relevant rules, and the money is invested with the aim of building a fund for retirement.
The main difference is investment choice. Depending on the provider, a SIPP may provide access to shares, investment funds, investment trusts, exchange-traded funds, bonds and gilts.
Greater choice does not necessarily mean better returns, of course, and investments can fall as well as rise. Charges also vary between providers and investments, so platform fees, fund management charges and trading costs should all be considered.
Making contributions tax-efficiently
For most people, the standard pension Annual Allowance is currently £60,000. This measures the total pension input during the tax year, including contributions made personally and by an employer. A lower allowance can apply to some higher earners and to people who have already flexibly accessed pension benefits.
There is also an important distinction between the Annual Allowance and the amount on which an individual can obtain tax relief. Personal contributions benefiting from tax relief are normally limited to 100% of relevant UK earnings, although someone with little or no earnings can usually contribute up to £3,600 gross each year.
Unused Annual Allowance from the previous three tax years can potentially be carried forward, provided the relevant conditions are satisfied. This can be particularly useful following an unusually profitable year, the sale of a business or when someone simply wants to catch up on pension funding.
Business owners should also consider employer contributions. A company can contribute directly to a director or employee’s SIPP and, where the appropriate conditions are met, the company may obtain corporation tax relief. This can make pensions an important part of wider remuneration and tax planning.
Accessing your SIPP
A pension is, however, a long-term investment. Most people cannot currently access private pension benefits until age 55, with the normal minimum pension age increasing to 57 from 6 April 2028, subject to certain protected pension ages.
When benefits are taken, up to 25% can generally be received tax-free, although the amount is now normally restricted by the Lump Sum Allowance of £268,275 across an individual’s pensions.
The remaining pension can potentially be left invested through pension drawdown, used to purchase an annuity, or withdrawn in lump sums.
Drawdown can be attractive because it provides flexibility over when and how much income is taken. It also allows funds to remain invested. However, this means investment risk continues into retirement and withdrawals need to be managed carefully to avoid exhausting the fund too quickly.
Taking taxable income flexibly can also trigger the Money Purchase Annual Allowance, reducing the amount that can subsequently be contributed to defined contribution pensions while retaining the usual tax advantages. The MPAA is currently £10,000 a year.
Combining pensions
Having a SIPP does not mean abandoning a workplace pension. It is perfectly possible to have both.
In particular, employees should think carefully before opting out of a workplace scheme where their employer contributes. Giving up employer contributions simply to move to a SIPP could leave them financially worse off.
Existing pensions can also often be consolidated into a SIPP, but transferring should never be automatic. Older schemes can contain valuable guarantees, preferential annuity rates or other benefits that could be lost on transfer.
What happens on death?
SIPPs can also provide flexibility when passing pension wealth to beneficiaries. Pension holders should complete and regularly review their expression of wishes or beneficiary nomination, particularly following major life events such as marriage or divorce.
The tax treatment on death depends on a number of factors, including the member’s age and how benefits are ultimately taken.
There is also a significant change approaching. From 6 April 2027, most unused pension funds and pension death benefits are due to be brought within the estate for Inheritance Tax purposes, making pensions and estate planning increasingly interconnected.
SIPPs can therefore be a powerful retirement-planning tool, particularly for people wanting greater investment choice and flexibility. The trade-off is that there are more decisions to make, and contribution, withdrawal and tax rules need to be considered carefully.
As with all pension and investment decisions, individual circumstances differ and regulated financial advice should be considered where appropriate.
