What is a SIPP?

A SIPP is a type of pension you can use to build your retirement savings by choosing your own investments. This article will explain what SIPPs are and how they work, as well as why they are important and can help you save for retirement. 

What is a SIPP?

A self-invested personal pension (SIPP) is a pension that gives you more freedom to choose how your retirement fund is invested. You get the tax relief that comes with a pension, coupled with similar tax efficiency and investment freedom to a stocks and shares ISA. 

Most other types of personal and workplace pensions aren't like this. They tend to have a narrow range of ready-made investment options for you to choose from.

How does a SIPP work?

Before getting into the specifics, here's a simple guide to how SIPPs work:

• You add money (known as a pension contribution) to your SIPP
• The government tops up your contributions via tax relief
• You choose how your SIPP is invested
• You could also transfer old pensions or another SIPP into a SIPP
• Access your SIPP from 55 (rising to 57 in 2028)

SIPP pros and cons

Please remember, any tax treatment depends on your individual circumstances and may be subject to change in future.

‍When you should consider a SIPP

People choose SIPPs for lots of different reasons. Here are some common scenarios:

📝 You'd like to save more for later life and retirement

Having enough money in later life is not guaranteed by a workplace or government pension. Adding a SIPP into the mix could help you take control and invest more for later life.

📝  You are self-employed

When you work for yourself, your pension is your responsibility, and you may not yet have opened a retirement savings account. A SIPP can play a key role in self-employed pension saving.‍

📝 You want to choose your own investments

How your pension is invested could be the difference between a comfortable and an uncomfortable retirement. With a SIPP, you make the investment decisions.

📝 You'd like your pensions in one place

Bringing old pensions under one roof can help you keep track of your investment performance and cost. A SIPP is a place where you can transfer and combine old pensions.

For more information and help, read our articles about pension consolidation and what to do when your pension is underperforming.

How are SIPPs different?

SIPP vs personal pension

SIPPs differ from other personal pensions in two main ways: investment options and who makes the investment decisions.

SIPP vs ISA

SIPPs and ISAs are both tax-efficient investment accounts, but there are a few key differences to consider:

• Paying in: Your annual ISA allowance is £20,000. The annual allowance for pension contributions is £60,000 for most people, though this tapers off for higher earners. You can still make contributions outside the allowance, but these will be taxed. 
• Tax relief: SIPPs contributions have tax relief on up to 100% of your annual earnings. ISA contributions do not.
• Taxes: While both types of accounts allow your money to grow without facing taxes on dividends and gains, SIPP withdrawals are taxed as income outside of an initial tax-free allowance (currently 25%). ISA withdrawals are not taxed.
• Access: SIPPs are designed for retirement, so you can't start withdrawing until you're 55 (rising to 57 in 2028). You can withdraw from a stocks and shares ISA anytime.

For a full breakdown, read our guide to SIPP vs ISA. 

SIPP rules

Who can open a SIPP?

Anyone under the age of 75 in the UK can open and pay into a SIPP.

How are your investments taxed?

In a SIPP, your investments have the chance to grow free from UK tax. So any dividends are free from UK income tax and profits free from capital gains tax.

How much can you pay into a SIPP each year?

Most of us can put up to 100% of our earnings or £60,000 (whichever is lower) into pensions each year. The allowance includes both workplace and personal pensions.

When can you take money out of a SIPP?

You can't access money paid into a pension until you reach age 55 (or 57 from 6 April 2028).

SIPP lifetime allowance

The lifetime allowance was the maximum amount you could save into a pension without needing to pay additional tax. This allowance was set at £1,073,100 until it was removed on 5 April 2024. There is now no lifetime allowance.

5 steps to opening a SIPP account

1. Pick a provider: Focus on features and fees. If you are not sure, find out more about how to pick the right pension. 
2. Transfer: Consider transferring existing pensions into your new SIPP. A partial transfer may be an option if you don't want to add your entire pension. Watch out for scheme exit fees and guaranteed benefits you might lose.
3. Combine: If you have multiple pension pots, you could use your SIPP to consolidate your pots into a single, easier-to-manage pot.
4. Contribute: When your account is open and your transfers are complete, it's time to think about contributions. Consider how much to add, and whether you want to make regular contributions. This is a good time to consider how much you need to retire and how you can get there.
5. Invest: With money in your pot, it's time to start investing. Think about what works best for you and remember the value of your investments can go down as well as up.

With your new pension open, maybe it's time to look for investing inspiration. Why not explore pursuing early retirement with our guide to F.I.R.E. (financial independence, retire early) or learn the secrets to building a £1m pension pot.

How to open a SIPP with Freetrade

A Freetrade SIPP is included on every plan, including our free Basic plan. That means no account fee and commission-free investing in your pension, whichever plan you choose. Other charges may apply.

You can invest in thousands of UK, US and European stocks, ETFs, mutual funds and more, and use limit orders and stop losses to manage your trading. Upgrade to Standard or Plus for lower FX fees and more interest on uninvested cash. Compare plans.

What can I invest in with a SIPP?

Compared to other personal pensions, SIPPs tend to be chosen for their flexibility when it comes to what you can invest in. Investments you could hold in a SIPP include: 

• Shares (including fractional shares)
• Exchange-traded funds (ETFs)
• Mutual funds
• Investment trusts
• Real estate investment trusts (REITs) 
• Exchange-traded commodities (ETCs)
• Bonds
• Gilts and treasury bills
• Cash

How to pick SIPP investments

Any investments we make should be guided first and foremost by what we are trying to do. The main purpose of a SIPP is to build a pension pot to live off later in life.

Given this, the way in which you invest in your SIPP will likely change over time.

When you are young, and retirement is still decades away, standard practice is to build a portfolio comprised mainly of assets that offer high potential growth but some risk of volatility. 

As you get closer and closer to the age at which you will be accessing your pot, you should gradually de-risk your portfolio. This means shifting to lower-risk assets like bonds and cash-like assets. 

For more information about saving during different life stages, read our in-depth guides: 

• Pension investing in your 20s and 30s
• Saving for retirement in your 40s and 50s

‍How your investments are taxed inside a SIPP

A key benefit of a SIPP is tax efficiency. Some of the tax-related benefits include: 

1. Tax relief: This is the government's way of topping up your pension contribution. This is where SIPPs stand out compared to other investment accounts. You won't get tax relief top-ups in an ISA or GIA.
2. Tax wrapper: A SIPP is a tax wrapper. This means the investments you hold inside a it grow free from UK taxes like capital gains tax and income tax.
3. Inheritance tax: When someone dies, SIPP funds do not form part of their estate, so they can be passed on free from inheritance tax.

Tax relief is a particular benefit, as it effectively amounts to the government topping up your pension contributions.

Read our full guide to pension tax relief for more information. 

Though they are tax-efficient, SIPPs won't quite protect you from everything. You will still need to pay: 

• Stamp duty: A 0.5% charge, paid and deducted at the time you buy some UK stocks.

How to take money out of your SIPP

You can start taking money out of your SIPP when you reach 55 (or 57 from 6 April 2028). But this doesn't mean you have to take money out then. You might choose to:

1. Retire later and keep contributing.
2. Arrange guaranteed retirement income through an annuity.
3. Take your entire SIPP as a lump sum.
4. Take multiple lump sums.
5. Gradually withdraw flexible income.