What is a SIPP (Self-Invested Personal Pension)?

You might have heard the word 'SIPP' thrown around. It stands for Self Invested Personal Pension and in this blog we'll give you all the information you need to know about what it is and how it works.

Research from GlobalData[1] shows that the UK self-invested personal pension market is estimated to grow by a huge £1.9bn a year in 2020.  

As SIPPs continue to be an ever popular choice to plan for your future, we’ve broken down the most commonly asked questions. 

What is a SIPP pension? 

Simply put, a self-invested personal pension, or SIPP, is a type of pension that lets you save for your retirement privately outside of workplace or state pensions. 

How does a SIPP work? 

SIPPs work much the same way as other personal pensions. You add money to your pension as and when you like and the government tops it up with 20% tax relief, boosting the amount of money you’ve saved. The basic-rate tax relief is claimed from the government then automatically added to your pension by your pension provider. 

How much tax relief you get depends on whether you are a basic, higher or additional rate taxpayer. Basic, higher and additional rate taxpayers qualify for 20%, 40% and 45% tax relief respectively.  It’s worth noting that high and additional rate taxpayers will have to claim their additional tax relief through the annual self-assessment tax return, as only 20% is received at source. 

So, if a basic rate tax payer earns £125 before tax, they would pay 20% income tax on that earning and receive £100 in their bank account. If they then deposit that £100 into a SIPP, the government gives you the £25 tax you paid back in the form of a contribution to your SIPP. Once it’s in your SIPP, your money can grow free from UK tax. 

When you reach your 55th birthday (or your 57th from 2028), you’re free to start withdrawing money from your SIPP, even if you’re not yet retired. You can usually take up to 25% of your pot tax-free. The rest of your withdrawals will be taxed as your income. 

As well as the tax relief benefits, SIPPs also make it easy for you to manage your pension by allowing you to see how it's doing online at any time, making changes whenever you like. 

At OpenMoney you can open up a SIPP with us for as little as £1, with no minimum and no upfront costs. To manage your SIPP we charge a low annual fee of 0.51% of whatever you decide to invest, meaning you could keep more of your money than with other investments. 

Can I have a SIPP and a workplace pension? 

It’s possible to have a SIPP and a workplace pension at the same time and you don’t need to close and move the workplace pension to open a SIPP for additional contributions. However if you leave your workplace pension in favour of your SIPP, it’s unlikely (although not impossible) that your employer will make contributions to your SIPP so we'd recommend keeping your workplace pension and having a SIPP in addition rather than as a replacement.  

Your total contributions, including those paid by your employer, to all schemes will be limited by the annual allowance. The maximum allowance for pension contributions in the current tax year (2019/20) depends on your annual salary.  

If you earn £40,000 or more, your allowance is £40,000, if you earn between £3,600 and £40,000, your allowance is equal to your annual salary and if you earn less than £3,600, your allowance is £3,600. 

For high-income individuals, every £2 of adjusted income above £150,000 will reduce their annual allowance by £1. The maximum reduction is £30,000, meaning that anyone with an adjusted income of £210,000 or above has their annual allowance reduced to £10,000. 

The current lifetime allowance for pension contributions is £1,055,000. Any amount withdrawn over £1,055,000 is taxed at 55% if taken as a lump sum or 25% if taken as an income.  

This is on top of any tax payable on the income according to your normal tax rate. You may be eligible for Individual Protection (2016) or Fixed Protection (2016) which could push your lifetime allowance up to £1.25 million. 

Is a SIPP right for me? 

With so many retirement options and all the jargon that fills the financial world, it can be hard to know what the right choice is when planning for your future. At OpenMoney a SIPP is one of the investment products we advise on, and we will only recommend it to you if it’s in your best interests.  As a SIPP is a form of investing, we will firstly check if investment is right for you and then if a SIPP is the right product to help you achieve your financial goals. 

A SIPP is not right for everyone, but the great tax relief benefits and the ability to track its performance anytime, makes it a great option to save for your retirement. If you need any further information about our SIPP, you can chat to our support specialists through our web chat platform on our online portal. 

[1] Ft Adviser

Remember, capital is always at risk when investing.
Fees correct as of 20/04/2022 and may exceed the stated value.

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