What is a SIPP?
A self-invested personal pension (SIPP) is a DIY pension that lets you save for your retirement and also receive additional benefits in the form of tax incentives.
A SIPP offers greater flexibility than some more traditional pensions, as you can choose a range of investments and assets to invest your pension funds in, rather than being restricted by the options selected by your pension manager on your behalf.
Because a SIPP is a self-invested pension it means you are in control of the investments you choose to make within your pension and, as with all investments, this carries risk. If you are in any doubt as to whether a SIPP is right for you, please seek independent financial advice.
How does a SIPP work?
A SIPP enables you to hold either a single asset or mixed assets (depending on the provider) within a single wrapper, which also carries tax benefits, as you pay the money in before income tax is taken off.
In practical terms, this means that contributions you make into your SIPP will have an instant tax relief of 20% applied at source, meaning your capital that is available for investment will be increased by 20%. Higher rate taxpayers can claim an additional tax relief of up to 20% retrospectively via their tax return. If you make a transfer from another pension plan you will not receive any tax relief as you will have already received the tax relief previously.
A SIPP operates in two primary phases. In the initial phase you make contributions or transfer existing pension funds to invest within your SIPP. During this period all investment income (and, in the case of our investments, capital repayments) are kept within the SIPP wrapper for reinvestment.
At age 55 you can start to withdraw your investment and capital returns as a pension income, although you can continue to reinvest your investment income if you choose. It is at the point of withdrawal that you pay tax on your income, at your marginal rate.
It is also worth noting that, under current pension regulations, you are permitted to withdraw up to 25% of your total pension pot as a tax free lump sum at age 55, though you should consider carefully (and take investment advice where appropriate) as to whether this would be the right decision for you and your retirement plans.