Your Questions on Self-Invested Personal Pensions (SIPPs)

We've looked at a number of questions our clients have raised on SIPPs to provide you with more insight on what they are and who might use them.

First and foremost, what exactly are Self-Invested Personal Pensions (SIPPs)?

Self-Invested Personal Pensions (SIPPs) are retirement savings plans which allow savers more choice over where their money is invested.

If you open a SIPP, you’ll usually have a wider range of funds to choose from when investing your pension savings, and you may also be able to invest in single company shares.

What are the benefits of Self-Invested Personal Pensions (SIPPs)?

Most savers who choose SIPPs do so because they want to have more control over where their money is invested than they would have in a traditional pension.

Who are Self-Invested Personal Pensions (SIPPs) recommended for?

In many cases SIPPs are recommended for people who are comfortable taking a hands-on approach to their finances. SIPPs are often chosen by people who already make investment decisions and are familiar with the risks involved.

SIPPs are usually best suited to savers with a sizeable pension pot, although they can be opened with an investment of £5,000.  Certain SIPPs can be quite low cost and allow you to invest in a wide range of funds, but if you want to consider commercial property as part of the portfolio,you would need to factor in an additional layer of charges.

Commercial property is a popular asset for investors seeking long-term returns in a self-invested personal pension.  The commercial property market can offer compelling yields, often in the region of 6 to 10 per cent with a number of tax advantages for investors who like the tangible nature of bricks and mortar.  However, as with any investment, it is extremely important to carry out comprehensive research and, given the complex nature of this form of investment, seek professional advice to avoid pitfalls to beware of when investing in commercial property.

When can you access funds held in a Self-Invested Personal Pension (SIPP)?

You can access the funds you have saved into a SIPP ten years before you qualify for the State Pension. This means that you can currently access a SIPP from age 55, but when the State Pension age rises to 67 in 2028, the age of eligibility for accessing a SIPP will rise to 57.

Deciding when to draw on the funds you have invested in a SIPP needs careful consideration. While drawing on these funds can help support an early retirement, you will sacrifice gains the fund could have made in the future. You must also fully understand the impact that taking funds from your SIPP might have on your tax position, and your ability to contribute further funds to your pension.

How much can you invest in a Self-Invested Personal Pension (SIPP)?

The amount you can invest in a SIPP while claiming tax relief is governed by an Annual Allowance and your Pensions Lifetime Allowance. You can still make contributions which exceed your allowances, however if you do, you may be liable to make additional tax payments depending on your overall financial circumstances.

You can invest up to 100% of your earnings in a SIPP in each tax year, up to a maximum Annual Allowance of £40,000.  Whilst you can pay in more, you may not receive full tax relief and may be subject to additional tax changes and to be tax efficient you should aim not to exceed the annual allowance. Any unused Annual Allowance can be carried forward for three years, provided you were enrolled in a pension scheme during those years. This can help with one-off investments of larger sums. The Annual Allowance is potentially reduced for those with an annual income (which would need to include the value of any benefits received such as pension contributions and health insurance for example) taking the package value of your income above £240,000.    This is a complicated matter and is one where we highly recommend you seek advice.

The Lifetime Allowance, which is the limit on how much you can build up in pension savings overall without having to pay additional taxes when you draw your pension, is frozen at £1,073,100 until the end of the 2025/26 tax year.

Can you consolidate other pensions into a Self-Invested Personal Pension (SIPP)?

Pension consolidation, which we talked about in last month’s financial fundamentals article, is when you bring together two or more separate pension accounts into one single savings plan is possible with a SIPP. Consolidating the various pensions you may have accrued over the course of your career into a SIPP can give you greater visibility over your total retirement fund, as well as more control over where it’s invested.

As with all questions of pension consolidation, though, this decision should not be made lightly and savers are advised to consult an expert before proceeding, who would check your current pensions for any other benefits you may lose, or charges you may face, by opting for pension consolidation.

Our experienced advisers can help you track down your old pensions, identify the implications of pension consolidation and manage the process for you if you do decide to go ahead or can assist with the management of the existing plans if it is in your best interest to retain these.

How to decide if a Self-Invested Personal Pension (SIPP) is right for you

The increased responsibility for making investment decisions in a SIPP means that it’s vital you speak to a professional adviser to decide if a SIPP is right for you. At McCrea, our team of experts can guide you through the decision, and as a fully independent company, we’ll help you make the choice that best suits your own unique circumstances.

Get in touch now for your free no obligation consultation on whether a SIPP is right for your retirement plans.