What is a SIPP and how does a SIPP work?

What's a SIPP?
We explain the ins and outs of self-invested personal pensions or SIPPs - from how these tax-efficient personal pensions work, to different types of accounts available and how you can pick SIPP investments to generate returns with limited losses. Read on to see if SIPPs are the right thing for your retirement.

What is a SIPP?

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 on your behalf or which only offers a limited range of investments to choose from.

Open a SIPP

Opening a SIPP is simple and isn’t so different from opening a stocks and shares ISA or a general investment account.

All you have to do is find a provider that offers the service and set up an account.

If you plan on transferring your existing pension into a SIPP account then you’ll need some of the details from that pension — more on this later. 

Once you’ve decided that a SIPP is right for you, it should be a case of just putting in a few personal details and you’ll be ready to go.

Paying into a SIPP

A SIPP has certain allowances attached to it that mean you can only receive tax benefits up to a certain point.

There is a cap on the amount you can contribute to your SIPP each tax year and still have it be tax-efficient. These allowances are set by the government and can change each year.

What is your SIPP annual allowance for 2021-22?

For the 2021/22 tax year, the annual allowance across all of your pensions is £40,000. 

You can contribute more than £40,000 if you want, but any amount beyond that figure will not receive tax relief, unless you can use carry forward of any unused allowances but only from the three previous tax years and only if you were a member of a pension scheme during those three years.

You should also remember that the tax allowance is dependent on your earnings. If you earn less than £40,000 then your allowance will be equal to the greater of your earnings or £3,600. 

For example, if you have earnings of £20,000, then you’ll only get tax relief on up to £20,000 that you contribute to your SIPP. But if you earn £3,000 then you’ll still get tax relief on up to £3,600.

The carry forward amount will also still be limited by your earnings. As an example, say you earn £50,000 but have an unused allowance of £100,000 from the prior three years. You will still only be able to contribute up to £50,000 and have it remain tax efficient. 

The other thing that will affect your allowance is if you earn more than £240,000 in adjusted income and £200,000 in threshold income.

In this instance, you will lose £1 of your allowance for every £2 of earnings you make over the £240,000 adjusted income threshold. 

Adjusted and threshold income can get a bit complicated, so if there is a chance that you fit in this category, it’s worth seeking some extra guidance on how they could impact you.

Lastly, if you have drawn any pension benefits that have triggered the Money Purchase Annual Allowance, which is currently set at £4,000, you will only get tax relief on contributions up to this amount made to a money purchase pension, such as a SIPP. This is regardless of whether you earn more than this and whether you have unused allowances to carry forward from previous years. 

SIPP lifetime allowance

The original intention was for the lifetime allowance to increase each year in line with inflation, however, the Government has temporarily frozen the lifetime allowance at £1.0731 million for the tax years 2021/22 through to 2025/26.

When you come to take benefits from any pension plans you may have, you can draw up to the value of the relevant lifetime allowance at the time without additional tax charges, over normal income tax rates, being applied.

There is nothing to stop you having an overall pension fund of more than the lifetime allowance and that might happen if for instance your investments have performed better than you had expected. 

You just need to be aware that if the value of the benefits you take from all of your pensions exceeds the lifetime allowance then the excess will be subject to a tax charge.

So if your pension fund looks like it might grow to more than the lifetime allowance by the time you take benefits, you might want to think about whether it is worth continuing to make contributions.

There were several occasions in the past when the government reduced the lifetime allowance. At those times investors impacted by the reductions were able to apply for various types of protection against the reduced lifetime allowance.

Most forms of protection can no longer be applied for, but if you are an investor who does have protection it is often worth hanging on to it. But beware, some types of protection can be lost if you make any sort of contribution to a pension plan.

There are a couple of types of protection of up to £1.25 million, known as Individual Protection and Fixed Protection 2016, that can still be applied for but the conditions required to obtain and hold on to them are quite complicated. So if you are interested in them then it’s worth seeking extra guidance to learn more about the process. 

Transfer your pension

If you do decide to open a SIPP then you may want to transfer your existing pension pot into that account. But remember that you can also open a SIPP and leave your existing pension plans as they are.

Opening a SIPP does require a bit of legwork but most of that should be handled by the provider you’ve opened the account with. You’ll just need to provide some personal details and information about your existing pension.

The thing you’ll really want to think about before making the move is whether a SIPP is right for you. If you’re unsure about this then seek professional advice.

There are benefits to SIPPs (more on this below) but there may also be positives to your existing pension that you’ll lose if you make the switch. 

Make sure you know what you’ll lose if you do transfer your pension and that you see a SIPP as being more beneficial to your financial wellbeing.

Find old pension pots and consolidate them to one single SIPP pension

Taking money out of your SIPP

You can start to withdraw money from your SIPP when you’re 55. 

This is set to rise to 57 in 2028 and there’s a chance it could change again after that, so keep an eye on this in the future.

The reason for this age limit is because SIPPs are intended to be for your retirement. 

When you do start withdrawing funds, you’ll generally be able to access up to 25% of your SIPP account tax free. 

The remaining 75% will be subject to income tax, depending on how much of your income tax allowance you’ve used.

Withdrawing your SIPP in one go

If you decide to withdraw all of your tax-free SIPP funds in one go, then you’ll have to do something with the 75% of its value that will be subject to tax. 

And what you decide to do will ultimately have quite a big bearing on how those funds end up being taxed.

But to make that decision, you’ve got to understand what’s on offer. 

1. Annuity

An annuity is a financial product that will pay out a fixed amount of cash at regular intervals in return for an up front fee. 

Some annuities will only last for a fixed period of time. Others will pay out until your death.

As an example, you might pay £50,000 to buy an annuity that pays out £6,500 per year for ten years.

How much you pay will depend on various things, including your age, the payout provided and the length of time that the annuity lasts.

If you decide to buy an annuity using money from your SIPP then you will not pay income tax on the money from the SIPP but you will pay it on income you receive from an annuity. 

For example…
  • You could have a SIPP account worth £100,000
  • You withdraw £25,000 to keep as tax-free income. 
  • You do not pay any tax on the other £75,000 but you use it to buy an annuity that pays out £5,000 per year.
  • Assuming you’ve used up your income tax allowance, you’ll have to pay income tax on those £5,000 annuity payments.

Annuities are good for people that want a secure source of income — you know what you’ll be getting and can plan accordingly.

The downside is that people often buy annuities to achieve a certain goal but then events take a different turn.

For instance, if you wanted your spouse to have an income after your death then you could buy an annuity to ensure that happens. Of course, if they were to pass away first then that annuity wouldn’t be of much use.

That’s not to mention the fact that, because they provide a guaranteed return, the amount of cash you generate from an annuity may be lower than other investments. They also offer no flexibility in terms of stopping and starting income — you’ll get your payment whether you want it or not.

Lastly, many annuities cannot be passed down as a form of inheritance. So if you pass away much sooner than you expected, having made a loss on that annuity, your children may not be able to access any funds that you wanted to leave to them.

2. Drawdown

Another popular option is to move some or all of your SIPP fund into a drawdown account. These are often known as flexi-access drawdowns.

This is essentially a way of keeping your money invested and — hopefully — growing during or prior to your retirement.

For instance, at 55 you could take 25% of your SIPP fund as cash, tax free, and keep the rest invested in a drawdown account.

The benefits of drawdowns are that you can end up growing your pension pot in retirement if markets perform well. This can mean you end up earning more than you would via an annuity. 

Another benefit is that you’re able to pass on drawdown holdings as an inheritance.

On the other hand, there is a risk that you can end up withdrawing too much and run out of funds. 

Markets could also go against you and you may end up losing more money than you would be comfortable with. In that sense, you lack the certainty that an annuity provides.

3. Taking out a lump sum

A simple thing to do with your SIPP account is to just withdraw everything as a cash lump sum.

Doing this will mean that 75% of your pension pot will be income tax assessable. As such, you’ll have to think hard about whether this is a good option for you.

The upside to withdrawing a cash lump sum is that you’ll have your pension money and have greater flexibility in choosing what to do with it. 

It may also be the only option on the table if you are looking to make a big, one-off expense with the funds from your SIPP account.

The downside is that you will lose out on the benefits that come with a pension pot, namely tax-free investment growth and the fact that your funds will be inheritance tax free if you die. 

Your money purchase personal allowance will also be triggered if you take your SIPP as a cash lump sum. That will reduce your annual money purchase pension contribution allowance to £4,000.

Withdrawing bits of your SIPP

You can always keep funds in your SIPP and withdraw smaller amounts to meet your ongoing needs.

This gives you a level of flexibility that can be beneficial for tax planning, or simply tailoring your holdings to your financial needs.

For instance, you could use a portion of your SIPP to buy an annuity, keep some of your funds invested and withdraw another lump sum as cash.

If you do decide to pay out a cash lump sum then you’ll pay tax proportionally on the amounts you withdraw. 

So if you withdrew £1,000, you’d pay no tax on 25% of that amount but would be tax assessable on the remaining 75%.

Can a SIPP be inherited?

A SIPP can be inherited but the process for passing them on is not usually the same as leaving behind any other assets that you own.

SIPP funds do not generally form part of a deceased person’s estate and so are not governed by a will. 

SIPP funds are instead paid to your beneficiaries who are chosen at the discretion of the scheme administrator. This discretion means they are generally free from inheritance tax.

That does not mean you have no influence on who your SIPP funds will be passed on to.

You should provide what is called an ‘expression of wishes’ or a nomination form to the scheme administrator as to who you would like your beneficiaries to be and they will normally look to follow your wishes. It’s important to keep this up to date should your personal circumstances change.

How those beneficiaries will be taxed depends on when you die. 

If you die before you’re 75 and the funds are transferred to your beneficiaries within two years, then they won’t have to pay any tax. 

But if you die after you’re 75, or if you die before then but do not set up your funds to be transferred to your beneficiaries within two years of your death, then they’ll have to pay tax on them.

The other thing to remember here is that your SIPP is not the same as an annuity or a lump sum of cash. Both of these things would be what you do with money withdrawn from your SIPP, so passing them on would not be the same as it would with a SIPP.

Types of SIPP

As the ‘Self Invested’ part of the name implies, SIPPs offer you control over how you invest your pension money but there are many different types of SIPP on the market.

They can broadly be split into two main types – Complex SIPPs and Streamlined SIPPs.

There is no difference between the two in terms of how much you can contribute, the tax advantages that apply and the way in which you can take benefits.

The difference lies in the services provided as to how you go about investing your money and also the range of investment you have access to.

There can be a degree of cross-over between the two types but the main features of each are as follows.

Complex SIPPs

These are what might be described as open architecture products allowing investors independent choice in three main areas:

  1. You decide which SIPP provider you want to operate your SIPP and pay them fees for the service they provide. They tend to be fees, rather than percentage related so by comparison become more cost effective the larger your fund is.

  1. You choose, subject to agreement by the SIPP provider, how and what you want to invest the money in your SIPP in and you pay investment related fees accordingly. 
For example you could…
  • Appoint any approved stockbroker or investment manager to invest it
  • Place the money on an investment platform of your choice for you or your financial advisor to choose investments available via that platform
  • Invest directly in say stocks and shares
  • Buy and lease out commercial property
  • A combination of the above.

  1. You choose which financial advisor you want to help you with your SIPP and pay their fees. Many but not all providers of complex SIPPs will require you to have a financial advisor but it is up to you who you wish to appoint and of course you can change who your advisor is.

The investment choice is therefore extensive, including non-standard and potentially high risk/return investments. 

This makes Complex SIPPs more suitable for high net worth and financially sophisticated investors who want to make use of the control and diversification of investment they facilitate. 

Streamlined SIPPs

These are what you might call a packaged product where each element of the SIPP has been pre-determined to offer the right investment service for particular investor needs.

The promoter of the service will have selected:

  1. Which SIPP provider will provide the pension administration services
  1. What investment choices and services are available. Normally there will be just one type of investment service and it will rarely allow non-standard investments.


For example..
  • Restricted to certain funds, or
  • Investment via one particular stockbroker, or
  • A link to an online trading platform to allow investors to trade in listed shares

  1. Whether it is sold via financial advisors or directly to investors.

The SIPP will often sit alongside other investment services being offered such as ISAs and a GIA.

The fee for the SIPP can therefore frequently be found to be part of the overall fees for the complete service and commonly will be a percentage of funds invested.

They also tend to operate using online and app based technology, so are interactive, quick and easy to use, with information for investors being readily available 24/7.

These types of SIPPs can offer good value for money, especially at lower values, for investors who are looking for a particular type of investment service.

SIPP fees and costs

Some SIPP providers will charge you a lot of different fees for holding a SIPP with them.

Lots of these can seem small and so you can end up forgetting that they cost a lot when you add them together cumulatively. 

That being the case, knowing what fees you can be charged when you open a SIPP account is vital. And if you want to compare pricing then you can use our calculator to crunch the numbers.

Administration fees

Almost every SIPP provider will charge you an annual fee for holding a SIPP with them.

This might be a flat fee paid on a monthly or annual basis, which could be anything from £45 to £200. 

It may also be an annual fee that’s paid as a percentage of the value of your portfolio. Again, this will vary depending on the provider, but a common standard is 0.45%.

Be aware that SIPP providers will give different names for this type of fee. Aside from ‘administration fee’, it might be called a ‘platform fee’ or just a ‘subscription’.

Trading commissions

You’ll want to invest in something when you open a SIPP. That’s kind of the whole point of opening one.

If you want to buy stocks, ETFs or any other exchange-traded products then you may end up having to pay trading commissions. These may only be a couple of pounds but they can also be as high as £12.

Some SIPP providers do offer commission free investing, so you won’t have to worry about these fees.

But if you do use a broker that makes you pay trading commissions then be careful as they can end up eating into the value of your portfolio. If you make a large number of trades over the years then this can have a significant impact on your investment performance.

Share and fund fees

On top of trading commissions, some companies will make you pay a fee for holding shares or funds in your SIPP.

This is similar to an administration fee and can be paid as a flat fee or as a percentage of the value of your investments.

Although it’s not definite, there’s a good chance that you won’t pay an administration fee if your SIPP provider makes you pay fees for holding stocks and funds.

Transfer/Exit fees

If you want to move your SIPP account to another provider then you can end up being charged for it.

This is increasingly rare nowadays but it can still happen, so make sure that you’re aware of any potential fees before you make any transfers.

Drawdown fees

When you want to start taking money out of your SIPP, your provider may charge you some hefty fees. 

For instance, some providers might make you pay over £200 per year when you go into drawdown, although this is a rarity. 

Is a SIPP right for me?

Like all big financial decisions, figuring out if a SIPP is right for you will depend on your own circumstances and knowledge.

Knowing the benefits and risks that a SIPP offers can help you make that decision. And if you still can’t come to a conclusion yourself then consider speaking to a professional financial advisor for help.

SIPP advantages


One of a SIPP’s key benefits is its tax efficiency.

When you make a contribution to a SIPP, you will get basic rate tax relief on it. The 2020/21 basic rate of tax is 20%. 

This will be arranged by your SIPP provider. So if you pay £80 into your SIPP, the provider will collect £20 from the UK tax authority. 

If you have to pay more than the basic rate of income then you can also claim that excess amount back, via your self-assessment tax return.

Say you were subject to 40% income tax, you could...
  • Pay £80 into a SIPP
  • Your SIPP provider will collect the basic rate, which would equal £20, from HM Revenue and Customs. You will then have £100 in your SIPP.
  • You could then claim an additional 20% back from the taxman, which would equal £20 as well.
  • This would mean you have £100 in your SIPP but it has only cost you £60.

This is not the only tax benefit that you can accrue from opening a SIPP. As we’ve already seen, assets and funds held in a SIPP are generally not subject to inheritance tax.

On top of this, your employer can contribute to your SIPP and it is exempt from tax on benefits in kind.

The other thing to remember here is that capital gains and dividend income is not taxed either, although the tax credit paid with dividends can't be reclaimed by the pension provider. 

This is significant because, if you hold a SIPP account for a prolonged period of time, it could mean you see serious compound growth in the value of your investments that would normally incur large tax charges.

Lastly, when it comes time to start taking money from your SIPP, you will get that 25% tax-free benefit on that money.

Be in control

One of the main reasons people open a SIPP is because they want to be in control of their pension investments.

If you are investing via a managed fund that your employer has chosen for you, it can be hard to really get an idea of what your money is being put into.

Holding a SIPP changes this as you are the one deciding what to put funds into. Having such control might be comforting because you know what’s going on with your money. 

It also means that you can invest in the things you want and not have an anonymous fund manager moving your money around.

Put your pension in one place

One of the frustrating things about the UK pension system is that it can leave you with several different retirement funds.

Luckily, employers in the UK are required to enrol you into a pension scheme when you work for them if you are eligible. And if you aren’t, they’re still required to offer you a scheme, even if they don’t have to pay into it.

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 hard to figure out where your money is.

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.


Investment risks

Execution-only SIPP accounts, like those offered by Freetrade, leave you to decide what to invest in. 

Investing is a risky business. 

This is true even for investment professionals, so if you don’t know anything about investing then that will increase the likelihood you’ll make bad decisions.

So if you feel uncomfortable investing or don’t know much about how to invest, then you may want to consider other pension options or an advised SIPP.


Costs can dramatically eat into your retirement savings, especially over the long term.

If you are looking for a SIPP, and because there are so many different types of SIPPs available, it's important you consider costs and don’t end up paying for services and options that you won’t use.

If you have a workplace pension scheme available to you, then they are hard to beat on costs, as not only will many employers be covering some or all of the admin fees, they will be making contributions for you as well.

Even if you have an old workplace pension from a previous employment these can still be cost effective especially if run as part of a large scheme.

So the message is, before you make contributions or transfer any old pensions to a SIPP, consider the costs. However, it’s not all about cost. Also consider value for money for the level and quality of service and investment options that are important to you.

What can I invest in with a SIPP?

There aren’t many limits on what you can hold in a SIPP. 

Some of the things you can hold include:

How to pick SIPP investments

Investing in a SIPP isn’t really that different from any other sort of investing. You want to generate returns but also limit losses.

The difference is that this is your pension fund, so you do need to be more careful than you might otherwise be.

Our guide on how to start investing could help you here but it’s also worth looking at what other people are doing to get an idea of how you might approach things.

Popular SIPP investments

Most SIPP investors with long careers behind them tend to be more risk averse. After all, no one wants to lose the money they have saved for their old age.

That means there are a few investments that tend to be more popular than others in SIPP accounts.

Some examples of this include…
  • Blue chip stocks - big companies like Barclays, Shell or Vodafone are popular as they have relatively stable share prices and tend to pay out regular, predictable dividends.
  • Index ETFs - as they track a large set of stocks, index ETFs tend to be less volatile and have produced slow but steady returns for investors, making them a good bet for a long-term investment.
  • Investment trusts - like ETFs, trusts tend to have a diverse range of holdings, making them less volatile and susceptible to big losses. Trusts can also hold on to 15% of their income to smooth payments out to investors.
  • Cash - SIPP investors will tend to hold more cash in their account as they near retirement. Even if interest rates are low, investors will want to know that they have access to some cash as their retirement date approaches.

What assets you can invest in aspart of your SIPP pension

What can you not hold in a SIPP?

You can invest in most asset classes within a SIPP. 

The big exception to this is residential property, which cannot be bought and held in a SIPP. 

Some SIPP providers will also not permit you to purchase commercial property.

Aside from this, it is generally more complex products, such as spread bets, that cannot be held inside a SIPP.

Having said that, some providers won’t offer certain products, so if you have an idea of what you want to invest in prior to opening a SIPP, remember to check that the provider you go with will actually be able to offer it to you beforehand.

Personal pension or SIPP?

Lots of people get stuck in a mental tug of war before they open a SIPP — they can see all of the benefits of having one but are fearful of taking control of their personal pension. 

There are a few key deciding factors and considering each should you help decide what to do.

  • Product choice - Think about what you want to invest in or are likely to invest in the future. If you know this then you can look at the pension products on offer and choose the more suitable option.
  • DIY or advisory? - If you’re comfortable making your own investments then an execution-only SIPP may be more beneficial to you. Conversely, it’s much more likely that you’ll want an advisory service if you’re unsure about how to invest your pension funds.
  • Fees and service - Like most decisions in life, thinking about how much you're going to pay for your pension product and the services you’ll get in return is something you should take into account. 

It’s also worth remembering that you can have both a SIPP and other pension schemes, so you don’t have to make a binary choice.

And if you’re really unsure as to what to do then you should seek professional investment advice for further guidance.


An important question that many investors have is why they should bother investing in a SIPP when they can just use an ISA.

This is quite a lengthy topic and we’ve written a more thorough guide to help you understand if you should choose a SIPP or ISA account.

The thing to remember is that a SIPP will attract tax relief when you make contributions into it. An ISA doesn’t.

That means you could deposit the same amount of cash into an ISA and SIPP over a prolonged period of time and end up with a substantially larger amount of cash in your SIPP.

Having said this, almost any withdrawals you make from an ISA are tax free. But a SIPP only allows you to withdraw 25% of your account tax free.

The thing to do here is try and estimate which option is likely to be most tax favourable. Is the larger lump sum that you invest in a SIPP going to be greater, after tax, than the amount you would get from your ISA? And will you need the money before you’re 55?

This is also not a binary choice. You can have both a SIPP and an ISA at the same time, using the respective tax efficiencies of both products for your benefit.


Are SIPP dividends tax-free?

Yes. Any dividend income generated by your SIPP investments will be put back into your account, without tax, although the tax credit paid with dividends can’t be reclaimed by your pension scheme. That income will be taxed, however, when you drawdown your account.

Are SIPP funds and assets protected?

When you invest with Freetrade via the Freetrade SIPP, any UK-listed stocks or ETFs that you buy are held in the name of the SIPP Trustee by Freetrade Nominees Limited, which holds stocks and ETFs, with you as the beneficial owner. The stocks and ETFs are held in CREST, which is the UK’s central security depository.

Freetrade Nominees Limited is a non-trading company. That means it can’t run up liabilities of its own and can be shielded from any liabilities that Freetrade Limited accrues.

All of this is done so that, in the unlikely event of Freetrade failing, the company’s creditors will not be permitted to use your investments to cover Freetrade’s liabilities.

When you invest in US-listed stocks, we hold them in custody at a third-party SEC-registered broker (the Security and Exchange Commission, which regulates US securities markets). 

Our customers’ stocks are held in a designated customer account at the broker, and cannot be mixed with Freetrade’s own assets or used to settle our debts. Similar to the UK securities being held in CREST, your US stocks are ultimately held in DTCC (Depository Trust & Clearing Corporation). Currently, some customers’ US stocks are still held by Freetrade Nominees Limited in CREST, but we are in the process of fully migrating US stocks to our third-party broker. You can read more about our security features here.

Can I have more than one SIPP?

Yes. You can open multiple SIPPs. Your annual and lifetime tax allowances, however, would remain the same. So if you had two SIPPs and the annual allowance was £40,000, your contributions to both accounts would still be subject to the one £40,000 annual allowance.

Who regulates SIPP providers?

SIPP providers are regulated by the Financial Conduct Authority.

Important Information

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 (set to rise to 57 from 6 April 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).

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. If you are unsure whether our SIPP product is right for you, you should contact a qualified financial advisor.

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).

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