SIPPs – Elements 13


This post is part of the Elements series, a Periodic Table of all the Investing Elements that you need to take control of your financial life. You can find the rest of the posts here.


What is it?

SIPP stands for Self-Invested Personal Pension.

It’s a tax-sheltered wrapper for your pension assets that you manage yourself.

  • You put in money each year out of your earned income – up to an annual limit of £40K, or your salary, whichever is higher – and you get tax relief at your marginal (highest) rate – 20% / 40%.
  • Your employer can also make gross contributions, and these count towards your annual allowance.

Once inside your SIPP, your investments grow free of income tax and capital gains tax, subject to a lifetime allowance (LTA) of £1M.

When you reach 55, you can start to take money out. Any withdrawals are taxed as income at your marginal rate at the time (hopefully 20% by then).

Your withdrawals each year are measured as a percentage of the LTA, and taken off your remaining LTA.

  • So if you withdraw £25K in your first year of retirement, and the LTA is £1M, that’s a 2.5% withdrawal. The next year your LTA would start at 97.5%.

If you use up all of your LTA, any further withdrawals are taxed at 55%.

What kind of element is it?

A SIPP is a product, offered by a wide range of providers in the UK.

Who needs it?

Everybody who is saving for retirement.

Once you’ve paid into your workplace pension in order to secure any matched contributions from your employer, the next port of call for your savings should be your SIPP.

The tax treatment of SIPPs is superior to that of ISAs (which are taxed on the way in, but not the way out). See here for more details.

The one caveat to this rule is if you expect to be able to retire before age 55 (ie. before you can access your SIPP).

In this case you need to save some of your money into ISAs, so that you will have some income to get you from your early retirement (FIRE) age to age 55.

You can work out whether you will be able to retire before 55 using our Four Pot Solution spreadsheet.

SIPPs are particularly attractive to higher-rate taxpayers, who get a bigger boost on the way in, and are more likely to be in a lower tax-bracket in retirement.

What comes before it?

Before you can afford to save for a pension, you need to:

  • build a short-term cash emergency fund (say six months of expenses)
  • clear down all your debts (apart from your mortgage if you have one)
  • contribute to your workplace pension in order to secure any matched contributions from your employer

You will need to have a budget in order to make sure you are cash positive each year (in order to pay down your debts, build up your emergency fund and have money left to invest).

You will also need a financial plan (how much money you will need and when, and how you will get there) and your financial statements to record your progress towards your goals.

What comes after it?

See also:  Bonds and P2P - Elements 23

All of the other non-core investment products. ISAs are the key product here, which will be useful to most people.

Even more exotic options include the recently announced LISA, and products like VCTs and EIS / SEIS.

In time – once you decide to retire – your SIPP can be converted into drawdown, which allows you to withdraw cash each year.

What age do you need it from?

As soon as you’ve cleared your debts, set up an emergency fund, paid your workplace pension contributions, and still have money left each year.

Twenty-five is a good age to start.

What age do you need it until?

At least age 55, since that is the earliest that the government will allow you to access your money. ((This limit used to be age 50, and I got within six months of withdrawing my money before the government upped the qualifying age – very frustrating, and I’m sure that the same thing will happen to more people in the future ))

There’s no compulsion to take money out from 55, and you can keep on working, or just leave the money invested until you need it.

How much does it cost?

Costs vary quite a bit, but the general trend over the years (SIPPs became popular in 2005, when Gordon Brown relaxed the rules) is downwards.

There is usually an annual charge for holding a SIPP, and on top of this there may be extra holding charges depending on the type of investments you hold within the SIPP (see next section for details).

These may be charged as a percentage of your portfolio’s value – meaning they rise as your pot grows – or they may be fixed, or they could be capped at a maximum value each year.

There are also charges for trading stocks (and ETFs and investment trusts) – commission charges.

You can expect the holding charges (excluding commissions) to be £200 to £300 pa for larger portfolios (£250K upwards).

What’s in it?

One of the key advantages of SIPPs – over workplace pensions, say – is the range of investments that you can hold:

  • cash
  • ETFs
  • investment trusts
  • individual stocks
  • OIECs (unit trusts)

ETFs allow you access to a wide range of other assets (commodities for example), and there are listed trusts that provide exposure to private equity and hedge funds.

What does a good one look like?

Since a SIPP is just a wrapper for underlying investments, the main criteria for evaluating them are:

  • costs
  • range of available investments
  • interface and support

A good SIPP is cheap, easy to use and offers a wide range of investments.

What does a bad one look like?

As usual, a bad one is the opposite of a good one – expensive, hard to use and with a poor range of investments.

Any recommended brands?

The last time we looked at this, iWeb (part of Lloyds bank) and YouInvest (A J Bell) came out on top.

Fidelity is also very cheap if you can deal with a (slightly) restricted range of ETFs and investment trusts.

What are the main risks?

SIPPs aren’t risky in themselves. Your assets should be ring-fenced if your SIPP provider fails, though only the first £50K of cash is guaranteed.

See also:  Insurance - Elements 18

SIPPs merely provide you with a way to access underlying investments, which can be as risky as you choose.

How do you deal with these risks?

You might want to have more than one SIPP.

  • I have three, though this is mostly for historical reasons.
  • It can be convenient to trade in one SIPP if the interface to another is down for some reason, but this happens very rarely.

You might also want to keep the cash level in each SIPP below £50K.

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 40 years, with some success.

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SIPPs – Elements 13

by Mike Rawson time to read: 4 min