Everything you need to know about Self-Invested Personal Pensions (SIPPs) including the risks, who they’re good for and what you need to consider before taking one out
Pensions are long term investments. You may get back less than you originally paid in because your capital is not guaranteed and charges may apply.
Private pensions can be a good way for saving for retirement, particularly if you’re self-employed, don’t qualify for auto-enrolment or want to top up your savings.
If you want ultimate control, including managing all your investment fund choices, then a SIPP might be right for you. However, there are risks involved, so it’s important you know what’s what before you take the plunge. Here’s what you need to know.
A Self Invested Personal Pension is a type of private pension, which means you set it up yourself, rather than it being decided on by your employer.
Specifically, a SIPP is a DIY pension, which means you are responsible for creating, investing and managing it until you retire.
How much you get when you retire will depend on what you pay in, your investment decisions, their returns and how much your provider charges.
The main risk is that you’ll make poor investment decisions, which means you’ll end up with less than you put in, so SIPPs are best for people who have done their research. You may wish to work with an independent financial adviser (IFA) who can help you.
There are four steps to investing in a SIPP:
Pick the company you want to invest with – consider the range of funds available as well as the fees and charges you’ll pay
Choose which funds you want to invest in – research carefully or work with an IFA. Remember that investments can go down as well as up.
Decide how much you want to invest in each fund - you want to make sure that you’re well-diversified so that you’re not putting all your eggs in one basket. Remember, trading funds usually attracts transaction fees and dealing charges, so the more you move your money, the more you’ll pay.
Manage your SIPP online – check your investments to see how they’re doing. Manage your contributions and make sure you’re invested wisely.
You are responsible for the performance of your pension when you invest in a SIPP, so take the time to study each fund before you start investing.
Investors should think of SIPPs as an addition to workplace pensions rather than an alternative. By law, employers have to contribute to their eligible employees’ retirement savings, but usually they will only do this through the scheme they’ve chosen and set up.
If you’re looking to make extra contributions, compare the costs of SIPPs with your workplace scheme, you may find it’s much cheaper to top up the scheme offered by your company. Some firms even offer matching, where the more you contribute, the more they add on top. This means that by going down the SIPP route, you can miss out on valuable employer contributions.
Money paid into private pension schemes also comes out of your post-tax salary. While you’ll be able to get your income tax back, you won’t have your National Insurance paid back too - something you can achieve if your workplace pension is set up using salary sacrifice.
There are also rules in place to try and ensure workplace pensions are low cost and well-governed, which makes them a great choice for many savers. Some workplace schemes will even allow you some flexibility over your investment choices, meaning you have more control over the funds you’re buying and selling.
That’s not to say they’re perfect, or their charges and choices can’t be beaten, but it does offer some protection.
You can use our comparison tool to find companies that let you set up and manage a SIPP. You may wish to consider the range of funds on offer and any help available. You should also check that the company is properly regulated.
It’s also critical to make sure you find out all the charges before you commit. This isn’t just the headline fee, but also things like transaction costs. Generally speaking, your options can vary from a ‘low-cost’ SIPP with fewer investment choices to a ‘full’ SIPP with a more complicated investment offering and a much higher charging structure.
Compare several different providers to make sure you’re getting the best deal. You need to check the following:
This is how much a company will charge you for setting up your SIPP, and can vary from no charge up to £500.
This is usually charged as a percentage of the total amount you have invested in your SIPP, although some companies charge a flat rate.
Some companies reduce their charges when you invest more than a certain amount, which means the more you save, the more cost-effective it is.
For example, a provider could charge 0.45% on any amount up to £250,000 but 0.25% on anything over £500,000.
Specific fees vary wildly to investigate each provider thoroughly.
You can buy or sell investments in your SIPP at any time, but this could result in a dealing charge of up to £10 each time you do it.
You may need to make account changes that have administrative charges, such as:
Transferring your pension to another company
Pension splitting due to divorce
Arranging death benefits
You may also get charged for requesting paper statements that show how much you have in your pension.
A SIPP can be a cost-effective way to save for your retirement as long as you pick the right firm. Make sure you compare as many as possible before you invest.
SIPPs typically offer a much wider range of investment options than many other pensions. You can make changes to your portfolio as often as you like, although there are some costs involved.
You should have access to:
Commercial property and land
Real estate investment trusts
Not every SIPP provider is the same, and so comparing the fund ranges on offer is an important differentiator when making your selection.
Some SIPPs will label their funds as high, medium or low risk to help you manage your investment choices. High-risk asset classes are often the ones with the most volatility.
You can find out the past performance of all funds offered by a pension company on their website, but remember this is not a reliable indicator of future performance.
You can seek independent financial advice to help you choose the right investment strategy and funds to choose. If you invest without taking proper advice, you’re more likely to make poor decisions and you’ll have less protection if things go wrong.
You should be able to view and manage your SIPP online through your chosen company's website.
You should review your funds on a regular basis to make sure they are performing well. However, if you see your funds falling in value, you shouldn’t rush to transfer them. Pensions are a long-term investment, and therefore you need to be prepared to ride out some volatility.
Selling while markets fall could mean you get less than you paid for a fund and that you lock poor prices in place. Of course, sticking with a losing bet isn’t the best plan either – so you need to decide if the investment is likely to come back or not when the market changes before making a decision.
If you are not comfortable managing your SIPP, consider speaking to an independent financial adviser to get advice or choosing a pension product where your investments are selected and managed by experts.
When you retire, 25% of your entire pensions savings can be taken tax-free, and the rest attracts income tax at your marginal rates. That means it’s important not to think about your SIPP in isolation, but as part of your whole pension portfolio, alongside workplace schemes and other savings.
Different elements of your pension have different access ages too, which might impact how you choose to draw from them. For instance, many people won’t get their state pension until 67, but could access their private pension a decade earlier. In this case, retirees might want to draw more from workplace savings to make up the shortfall till the state pension kicks in.
Most people can access their SIPP from 55, though this is due to rise to 57 from 2028. You have several choices in terms of how you take your money, including buying an annuity, taking a series of lump sums, or taking the whole lot as cash. Some SIPP companies charge you for withdrawing money from your pension fund, whether as a lump sum or as regular income payments.
Employers can choose to pay into a SIPP, but many won’t. Businesses have to set up workplace schemes under auto-enrolment laws, so many companies prefer to contribute to these instead. If you have a workplace pension, make sure to check whether your company offers any matching. This is when they pay extra money into your pension when you do. If matching is an option, you are likely to be better off increasing contributions rather than opening a SIPP for your money.
You can contribute up to your annual salary each year, or £3,600, whichever is higher. The first £40,000 you contribute each year is also tax-free (rising to £60,000 after April 6, 2023).