Self-Invested Personal Pension (SIPP): What it Means, Examples

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

A self-invested personal pension (SIPP) is a tax-efficient retirement savings account available in the U.K. SIPPs give individuals the freedom to allocate their assets in a wide range of investments approved by the country’s Her Majesty’s Revenue and Customs (HMRC), a non-ministerial department of the U.K. government responsible for tax collection and the payment of some forms of state support. Approved investments include stocks, bonds, mutual funds, and exchange-traded funds (ETFs). 

This is in contrast to company-sponsored pensions, where the company chooses a short list of investment options. 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.

Understanding Self-Invested Personal Pensions

The self-invested personal pension illustrates some of the differences between retirement plans in the U.S. versus the U.K. In the U.S., retirement plan tax relief works in one of two ways. The first option is to invest pre-tax 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 SIPP employs a third option. In the U.K., taxpayers are eligible to claim tax relief on pension contributions on 100% of their earnings, up to £40,000 annually. This relief comes in the form of a refund that is contributed toward the pension. For example, an individual who pays the basic rate of 20% and contributes £10,000 to their SIPP account. This person is eligible to reclaim £2,000 from the HMRC, which will then be deposited into their SIPP account. There is no tax relief for pension contributions exceeding the £40,000 threshold.

SIPP Fee Management

As with other investment accounts, managing self-invested personal pension 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 is 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.

Withdrawals From a SIPP

Individuals participating in a self-invested personal pension are free to start withdrawing funds beginning at age 55, even if they are still employed. Typically, individuals can take up to 25% of their funds tax-free. The rest is taxed as income. Notably, once funds are deposited in a SIPP, they can grow free of U.K. capital gains and income taxes. Tax benefits depend on the individual’s specific circumstances.