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What's a SIPP?

We explain the ins and outs of the tax efficient pension account
What's a SIPP?
April 16, 2021

A self-invested personal pension or ‘SIPP’, as it’s more commonly known, is a type of investment account available to people in the UK designed to help you save for retirement. 

A SIPP lets you do exactly what its name suggests. It’s a personal pension account that lets you decide what to invest in.

Most other pension plans aren’t like this as they involve you handing over your money to a company that will decide how to invest it or will only provide you with a limited choice of investments.

How does a SIPP work?

A SIPP is a bit like a stocks and shares ISA

You deposit money, invest and receive several tax benefits along the way.

One big difference is that you cannot access the investments you’ve made in a SIPP until you’re 55 — and this is may potentially change to 57 in 2028. 

As you can probably guess, this restriction is in place because a SIPP is supposed to form part of your retirement funds. 

That means any money you put in and any gains you make from investments are designed to be used in your retirement and not before. But in exchange for restricted access you do get valuable tax benefits.

What are the benefits of opening a SIPP account?


The big benefit of investing via a SIPP account, over a GIA, is the range of tax relief you get on your investments.

Firstly, you’ll get tax relief on cash you contribute to a SIPP.  The amount of relief you receive is relative to how much income tax you pay.

Under current rules, basic rate income tax relief of 20% will be collected from HMRC and added to your SIPP regardless of the how much income tax you pay. This means if you pay in £80, your SIPP will receive an extra £20, boosting your payment to £100. If you pay income tax at a rate higher than the basic rate you can claim an additional tax rebate yourself. So in our example if you pay income tax at 40%, not only would you have £20 added to your SIPP but you could get a further £20 back in your pocket. This would mean your £100 paid into your SIPP only cost you £60.

Sadly, there is a cap on how much you can deposit into pension plans each tax year and get income tax relief. The rules can be a bit complex but the rule of thumb for most people is to cap payments to the lesser of your tax year earnings (or £3,600 if your earnings are less than this) and £40,000 (the Annual Allowance for 2021/22).

In a bit more detail, if you do pay in more than your earnings or the Annual Allowance then HMRC will normally claw back any excess tax relief by charging you personally via your tax return. If you are a very high earner e.g. over £240,000pa, the Annual Allowance may be tapered down in stages to as low as £4,000.

Also if you have already taken some benefits out of a pension plan you may be subject to what is called the Money Purchase Annual Allowance (which is £4,000 for the tax year 2021/22). So if this applies to you, you may want to consider keeping payments into your SIPP within this amount to avoid an HMRC tax charge.

If you are in the position to build up a pension pot worth over £1 million then you also need to be aware of the Lifetime Allowance. This is currently set at £1.0731 million for the tax year 2021/22 but does increase each tax year in line with inflation. If you take benefits in excess of the Lifetime Allowance then the excess will normally be subject to a tax charge.

Whatever sum of cash you do end up investing, any money you make — whether from capital gains or dividends — will be free from tax until you start making withdrawals. 

At that point, the rules allow you to withdraw up to 25% of the value of your SIPP tax-free and pay regular income tax on the rest, subject to being within the Lifetime Allowance applicable at the time.

One last tax benefit is that generally your SIPP fund can be passed on to your beneficiaries free of inheritance tax. If you are unfortunate in dying before age 75 then they will not be liable for any personal tax on what they receive either.

Pick your own investments

There’s nothing wrong with getting other people to manage your money, but many people prefer to take control over what they invest their pension in, as well as the fees they pay.

Opening a SIPP is an effective way of taking control of the investments you want to make for your retirement. 

You get to decide what you invest in. No one is going to be putting your cash into assets you don’t like and you’ll be able to see exactly what your holdings are, something that can be surprisingly tricky when you put your money into a fund.

Not only does this provide you with greater opportunity to select the assets you want, it also means you can be more flexible with your investments. 

Moving your money between funds, by contrast, can be less flexible. You also have little leeway when it comes to choosing specific assets that you want to invest in. 

A SIPP doesn't have this problem as you can buy and sell assets in much the same way that you would if you were using a GIA or stocks and shares ISA.

Put your pension in one place

One of the frustrating things about UK pension schemes is that it you can end up with several different retirement funds.

Luckily, most employers in the UK are required to enrol you into a pension scheme when you work for them. 

This is not a bad thing but, if you work for a few companies over your career, you can end up with several different pensions, making it trickier to figure out where your money is and to keep tabs on how it is doing.

On top of this, those pension funds can be opaque and you may find it hard to figure out who is actually managing your money and what it’s being invested in.

Opening a SIPP is one way of making things less chaotic. 

Once you’ve opened a SIPP, you may have the option to transfer your old pensions into that single account. All of your pension assets are then in one place and, because you are the one deciding what to do with your cash, you know what you are investing in.

Plus it could save you money just paying one SIPP fee, rather than paying fees for each of your old pensions.

SIPP fees

Most SIPP providers will charge you a percentage of the value of your portfolio on an annual basis. 

The problem with these percentage fees is that, as your SIPP grows in value, the amount you pay increases too. 

You may also have to pay trading commissions, foreign exchange fees and, if you invest in certain assets, management fees. 

All of these things add up and they eat into any profits you make. 

That’s why Freetrade offers a SIPP at a flat fee of £9.99 per month or £7 for Plus members — we don’t want you to lose more as you gain more.

In addition to this, you won’t pay any trading commissions and we offer a low foreign exchange fee.

You can learn more about our SIPP offering and open an account with us by visiting our dedicated SIPP page.

SIPPs are a pension product designed for people who want to make their own investment decisions. You can normally only access the money from age 55 (expected to rise to 57 from 2028). This article is based on current rules, which can change, and tax relief depends on your personal circumstances.

When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. 

Before transferring a pension you should ensure you will not lose valuable guarantees or incur excessive transfer penalties. Pensions are usually transferred as cash so you will be out of the market for a period.

Freetrade does not currently offer drawdown products for our SIPP.

The fees described in this article do not include any fees which may be charged by product manufacturers (e.g. ETF management fees).

Important Information

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.

When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.

Eligibility to invest into an ISA and the value of tax savings depends on personal circumstances and all tax rules may change.

Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).