What is a SIPP: a guide for beginners

Traditional pension schemes allow you to invest for the future, to ensure an adequate quality of life after you retire. Among the various options available, there is SIPPs, Self-Invested Personal Pensions, a more versatile type of personal pension that allows you to choose which investments to make.

They are tools suited for those who want to make their own investment decisions; however, you can also consult a financial advisor.

Let’s look at what a SIPP is, what types of investments you can make and what the financial benefits of this type of personal pension investment are.

A SIPP is a flexible and cost-effective option for saving ahead of retirement. Self-invested pensions allow you to choose how to manage your money, by building a personalised pension based on your needs, without allowing pension providers to make decisions for you.

In this case, you must take responsibility for your investment choices, in that over time the invested capital could increase or decrease in value. Furthermore, you must have skills and time at your disposal to look after a SIPP, in order to manage your savings properly until retirement.

Compared to other types of personal pensions, SIPPs offer more investment options to choose from. Once you open a SIPP, you can also change it or add new investments to your initial ones. As you have complete control, you can make all the changes you want, you just have to follow certain restrictions imposed by law.

The money accrued with SIPP investments can be withdrawn once you reach 55 years of age, though from 2028 the minimum age will increase to 57. There are many available options, including:

• Keeping your money in the SIPP and withdrawing it later on
• Turning the SIPP into a flexible retirement income for life or for a limited length of time
• Withdrawing 25% of the SIPP capital in tax-free cash
• Withdrawing the whole SIPP at once, with 25% of capital tax-free and the remainder taxed

SIPP holders can also open a dedicated deposit account, where they can deposit pension savings in cash. Into this account you can only deposit pension funds transferred from the SIPP, choosing either a fixed or flexible account.

These accounts allow you to make a return on the cash amount in the SIPP, with an interest rate that is generally higher than that offered by the provider where the SIPP was opened. Based on the type of SIPP account, you may receive a fixed or variable interest rate; however, not all SIPPs allow you to link an external deposit account.

With a Self-Invested Personal Pension, you can invest in a wide range of financial products. However, you cannot invest in residential properties, though in some cases you can invest in commercial properties. The main activities included in SIPPs are:

• Investment trusts
• Real Estate Investment Trusts (REITs)
• Open-Ended Investment Companies (OEICs)
• UK and overseas shares
• Exchange-Traded Funds (ETFs)
• Government and corporate bonds
• Cash ISAs
• Commercial properties

Based on the type of investment you want to make, you can open a Full SIPP or a Simple SIPP. A Full SIPP offers a wide range of investments that include low-risk products such as funds and bonds, and more high-risk products such as shares and derivatives. However, it comes with high fees that must be closely monitored.

Alternatively, Simple SIPPs are the most commonly used SIPPs in the UK as they are easy to manage and have lower fees. Some Simple SIPPs offer a limited range of investment options, for example only trusts, so you must weigh up whether this option is suitable to your pension needs.

Now that we have established what a SIPP investment is, let’s look at how to start a Self-Invested Personal Pension in the UK. You must choose an intermediary authorised by the Financial Conduct Authority (FCA), for example a bank or an investment broker, and weigh up the types of SIPPs offered and the investments you can make towards your personal pension.

Following this, you can choose a ready-made investment portfolio or hand-pick your own investments. Deposits into your SIPP can be made irregularly or at fixed intervals, for example you can deposit a lump sum by making a one-off payment or by setting up a direct debit with your current account. 

In the UK, a SIPP can be opened by anyone under the age of 75 and you can transfer other pensions into it at any point in time. You can also open SIPPs for your employees or open a Junior SIPP for a minor.

Here’s how to set up a SIPP:

• Decide which pensions to transfer into your SIPP
• Work out the investment risk level
• Decide where to invest your savings
• Choose whether to manage your investments or entrust them to a financial advisor

SIPPs offer various benefits, especially in tax terms. In the UK, you can make tax-free investments by not paying tax on capital gains or income.

SIPPs are also exempt from inheritance tax and you can make use of 100% tax relief on income tax for up to £40,000 per tax year.