Are you planning for retirement and considering all the options available? Then, at some point, you have likely wondered, "how do SIPPs work?" A Self-Invested Personal Pension (SIPP) gives you greater control over your investments, offering flexibility and allowing for a tailored approach to growing your pension.

Recent research from the Pensions and Lifetime Savings Association (PLSA) suggests that a couple may need up to £59,000 per year for a comfortable retirement.¹

While this may seem daunting, SIPPs offer flexibility and diverse investment options to help you reach your financial goals.

At EveryInvestor, we break down the complexities of SIPPs; our expert-reviewed content ensures you have the latest insights to take control of your retirement savings.

Read on to discover how SIPPs can work for you...

SIPP: How Does It Work and What Do You Need to Know?

A SIPP (Self-Invested Personal Pension) gives investors control over their retirement savings, allowing them to select from various investment options like stocks, bonds, and funds.

It offers flexibility and tax advantages, making it a popular choice for those who want to manage their pension actively.

Let's take a closer look:

How Does a SIPP Work?

A SIPP works by giving individuals greater control over their pension investments, allowing them to choose from various investment assets that include stocks, bonds, and property, tailoring their retirement savings to their financial goals.

Contributions benefit from tax relief as they are made from pre-tax income, helping the pension fund grow faster; this way, individuals can decide how much to contribute each year, subject to government limits.

Compared to traditional pensions, this SIPP structure makes this scheme ideal for people who want a say in managing their pension pot and prefer a diverse investment portfolio.

What Are the Key Features of SIPPs?

The main key feature of SIPPs is that they allow you control over your investments, though there are numerous other benefits as well.

These key SIPP features include: 

• It offers tax relief on contributions.
• It offers flexibility around how and when you can draw your benefits.
• It allows you to consolidate all your pension pots.
• It lets you pass on any remaining funds to your heirs.

Keep in mind that there are also certain risks associated with SIPPs—such as potential investment losses and the impact of market fluctuations—and that managing these risks will be the individual investor’s responsibility.

Who Is Eligible for a SIPP?

Any UK resident under the age of 75 is eligible for or to contribute to a SIPP, regardless of their employment status²; non-residents may also open a SIPP if they wish to transfer a UK pension into it.³

SIPPs offer flexibility similar to other pension products, allowing for regular contributions or larger lump sums when possible.

What sets this plan apart is the broader range of SIPP investment options available, enabling individuals to build a personalised retirement strategy.

Some of these investment options may include:

• Stocks and shares
• Exchange Traded Funds (ETFs)
• Investment trusts
• Unit trusts
• Open-Ended Investment Companies (OEICs)
• Gilts and corporate bonds
• Real Estate Investment Trusts (REITs)
• Commercial property
• Cash
• Commodities
• Structured products
• Hedge funds

What Is a SIPP Fund?

A SIPP fund simply refers to the investment options within a SIPP, so unlike traditional pensions, SIPPs offer assets like stocks, bonds, commercial property, and cash.

Each type of SIPP fund carries its own risk and potential reward; for example, equity funds may provide higher growth but come with more volatility, while government bonds or cash funds are generally safer but offer more modest returns.

The right mix of funds is essential to ensure your retirement savings meet your financial objectives, and consulting a financial adviser can help you get that mix right for your circumstances.

How Do You Open Up a SIPP?

Opening up a SIPP typically involves filling in an application form with a SIPP provider and choosing your investments, but before you get to that stage, it's important to consider factors such as fees, services, and investment options available when choosing a provider.

Here's what you need to know:

What to Consider When Choosing a SIPP Provider

Choosing a SIPP provider is an important step in setting up your self-invested personal pension, requiring you to consider factors such as customer service and investment options.

When selecting a provider, consider the following:

1. Range of Investment Options: Ensure the provider offers a variety of investments that align with your goals.
2. Provider's Reputation and Financial Stability: Choose a provider with a solid reputation and financial stability to ensure the safety of your retirement funds.
3. Customer Service: Good customer service is key, particularly if you need assistance with your account or investment choices. Look for providers that offer accessible support.
4. Fees: Different providers have varying fee structures. Consider how these charges will impact your overall returns.

Opening a SIPP Account

Opening a SIPP account typically involves completing an online application form with your chosen provider, where you will provide personal details such as your National Insurance number, employment status, income, and bank information.

Once your details are submitted, you'll decide how to fund your SIPP, whether by transferring an existing pension or making a payment through bank transfer or debit card.

Take a look at these funding options:

Transferring Existing Pensions to a SIPP

Transferring an existing pension to a SIPP can provide greater investment flexibility, but it's important to assess potential costs and risks.

Some pension providers charge exit fees, and certain benefits, such as guaranteed annuity rates, may be lost in the transfer; additionally, if you’re moving a defined benefit pension worth over £30,000, UK regulations require you to seek professional financial advice to ensure the transfer is in your best interest.⁴

Making a Bank Payment to Open a SIPP

Funding a SIPP through a bank transfer or debit card payment is a straightforward way to start building your pension savings, and most providers allow one-off lump sum payments or regular contributions, depending on your financial plans.

Keep in mind that tax relief will usually be added automatically for basic rate taxpayers, boosting your contributions.

Checking with your provider about any limits, processing times, or fees can help ensure a smooth transaction.

How Do You Manage Your SIPP?

Effectively managing your SIPP requires regularly reviewing your investment portfolio to ensure it aligns with your retirement goals and risk tolerance.

Keeping track of market trends and economic conditions can help you make informed decisions about asset allocation, though as you get closer to retirement, you may need to adjust your strategy by shifting towards lower-risk investments to protect your savings.

Keep these methods in mind:

Making Contributions

When funding your SIPP, you have the flexibility to make regular contributions or one-off payments, depending on your financial situation and retirement goals.

Regular contributions can be scheduled monthly, quarterly, or annually, using direct debit, standing order, or payroll deduction—employers may also contribute, though this is not mandatory.

Another option is consolidating existing pensions by transferring funds from workplace or personal pension schemes into your SIPP, which can simplify pension management and potentially reduce fees, though it's important to assess any transfer charges or loss of benefits before proceeding.⁵

Annual Allowance Considerations

When saving into a SIPP, the annual allowance currently stands at £60,000, allowing most individuals to benefit from tax relief on contributions up to this limit.

Contributions exceeding this threshold are still permitted, but they won’t qualify for tax relief, potentially reducing the overall tax efficiency of your pension savings.⁶

If you’ve used up your annual allowance, you may be able to carry forward unused allowances from the previous 3 tax years, provided you were a member of a pension scheme during that time.

Lifetime Allowance Considerations

With the abolition of the £1,073,100 lifetime allowance in April 2023⁷, pension savers no longer face tax charges for exceeding this threshold; previously, any pension savings above this limit were subject to additional tax penalties when withdrawn.

While the removal of the lifetime allowance provides greater flexibility for high-value pension savings, other limits, such as the annual allowance and potential tax implications on withdrawals, remain important considerations when managing a SIPP.

Investment Decisions & Monitoring Your SIPP

Regularly assessing your investment decisions ensures your SIPP remains aligned with your retirement objectives as market conditions, risk tolerance, and personal circumstances can change over time, making it essential to adjust your portfolio accordingly.

Seeking guidance from a qualified financial or pensions adviser can help you develop a well-diversified strategy that balances growth potential with risk management, ensuring your pension savings work effectively towards your long-term financial security.

Adjusting Your SIPP As You Approach Retirement

Adjusting your SIPP to lower-risk investments, such as bonds or cash funds, can help protect your pension savings from market volatility as retirement nears.

Planning your withdrawal strategy is equally important, whether through drawdown, annuities, or lump sum withdrawals.

How Do You Make Withdrawals & What Are the Tax Implications?

When withdrawing from your SIPP, you can typically take up to 25% of your pension pot tax-free, with the remaining withdrawals taxed as income.

How you withdraw—whether as a lump sum, flexible drawdown, or annuity—can affect your overall tax liability, so planning your withdrawals strategically can help minimise tax and ensure a sustainable retirement income.⁸

Take a look at the implications:

Taxation of SIPP Withdrawals

SIPP withdrawals are typically structured so that 25% is tax-free, while the remaining 75% is subject to income tax based on your marginal rate.

This means that the more you withdraw, the higher the tax you may pay; therefore, careful planning of your withdrawals can help manage your tax liability and preserve more of your pension savings for retirement.

When Can I Access My SIPP? Early Access & Withdrawal Rules

You can access your SIPP from the age of 55, rising to 57 from 2028, even if you're still working; at this stage, you can withdraw a lump sum, take a flexible income, or buy an annuity.

Up to 25% of your SIPP can be taken tax-free, which is especially helpful in the early stages of retirement.

However, early withdrawals may reduce the funds available later in life, so it's important to balance immediate needs with the long-term growth of your pension pot.

Common Questions on Self-Invested Personal Pensions

In Conclusion

SIPPs provide significant flexibility, offering a wide array of investment options, potential tax benefits, consolidation of pension pots, and flexible contributions, making them a valuable tool for tailored retirement planning.

However, with this flexibility comes the responsibility of actively managing your investments and understanding the associated risks. Effectively navigating these complexities requires informed decision-making and the right kind of professional assistance.

By fully understanding how SIPPs work, you can take control of your retirement planning, make well-informed decisions, and leverage the benefits to build a secure and tax-efficient retirement.