Self Invested Personal Pension (SIPP)

DEFINITION of 'Self Invested Personal Pension (SIPP)'

A tax-efficient retirement savings account available in Great Britain. Self-invested personal pensions (SIPPs) give individuals freedom to put their money in a wide range of investments, including stocks, bonds, mutual funds and exchange-traded funds (ETFs), unlike company-sponsored pensions, where the company chooses a short list of investment options to offer. SIPPs were introduced in 1989 and have become increasingly popular in Great Britain because of the end of lifetime careers and lifetime final salary pensions.

BREAKING DOWN 'Self Invested Personal Pension (SIPP)'

In the United States, retirement plan tax relief works in one of two ways. The first option is to invest pretax dollars, enjoy tax-free growth within the account, then pay taxes on withdrawals, as with a traditional IRA or 401(k). The second option is to invest after-tax dollars, enjoy tax-free growth within the account, and withdraw money tax free, as with a Roth IRA or Roth 401(k).

The UK’s SIPP employs a third option. It adds to individuals’ contributions at a percentage based on their marginal tax rate. With basic tax rate relief, the federal tax agency adds 25% to whatever you contribute to a SIPP. So, for example, if an individual is in the 25% tax bracket and contributes £4,000 to a SIPP, the government will add £1,000 under basic tax rate relief, and the individual’s total contribution will be £5,000. The UK’s highest marginal tax rate is 45%, so SIPPs can offer tax relief as high as 45%.

As with other investment accounts, managing SIPP fees is important. Individuals should see whether a SIPP charges a fixed annual fee, a percentage of the portfolio value, trading commissions or other fees before opening an account. It’s important to choose a low-fee option to avoid harming long-term investment returns. For example, a fixed annual fee might be cheaper for someone with a high-value portfolio than an annual percentage fee. Account holders can manage SIPP investments themselves online or hire an investment manager.