What is a self-invested personal pension (SIPP)?

SIPPs explained

When we hear the word pension, most people think of retirement. But throw in SIPP (or even self-invested personal pension) and you’re at risk of losing people. Not to mention most of your mates.

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But it’s important to know about SIPPs. They are a key product when it comes to saving for your future and being able to live how you’d like to in retirement.

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In this guide, we’re here for one thing and one thing only. And that’s to simplify SIPPs.

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SIPP key takeaways

If you’re short on time, here are the SIPP headlines.

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• SIPPs are designed to help you build up a pension pot you can live from later in life
• The government tops the contributions you make (up to a certain amount)
• You have complete control when it comes to how your SIPP is invested.
• You can have a SIPP as well as your workplace pension and ISAs.
• You don’t need millions of pounds, start by investing small sums regularly.
• The earlier you start a SIPP and invest, the longer your investments will have to grow.

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What is a SIPP?

To make sure we’re all on the same page, let’s start with a quick SIPP definition.

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A self-invested personal pension or ‘SIPP’ is a type of investment account designed to help you save and build up a pension pot for retirement. And, as the self-invested label suggests, it’s a personal pension account that lets you decide how your pension pot is invested.

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Most other types of personal and workplace pensions aren’t like this, they tend to have a set range of ready-made investment options for you to choose from.

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With a SIPP you are free to make the investment decisions.

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How does a SIPP work?

Before getting into the specifics, here’s a simple guide to how SIPPs work:

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• You add money (known as a pension contribution) to your SIPP
  

• The government tops up your contributions via tax relief
  

• You choose how your SIPP is invested
  

• You could also transfer old pensions into a SIPP
  

• Access your SIPP from 55 (rising to 57 in 2028)

SIPP pros and cons‍

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Please remember, any tax treatment depends on your individual circumstances and may be subject to change in future.

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When you should consider a SIPP

People choose SIPPs for lots of different reasons but here are some common ones:

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📝 You’d like to save more for later life and retirement

Having enough money in later life is not guaranteed by a workplace or government pension, in fact far from it. Adding a SIPP into the mix could help you take control and invest more for later in life.

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📝  You are self-employed

When you work for yourself, your pension is your responsibility. A SIPP may be your key to retirement.

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📝 You want to choose your own investments

How your pension is invested could be the difference between a comfortable and uncomfortable retirement. With a SIPP you make the investment decisions.

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📝 You’d like your pensions in one place

Bringing old pensions under one roof can help you keep track of your investment performance and cost. A SIPP is a place where you can transfer and combine old pensions.

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How are SIPPs different?

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SIPP vs personal pension

SIPPs differ from other personal pensions in two main ways: investment options and who makes the investment decisions.

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SIPP vs ISA

You are not alone if you’re wondering how SIPPs and ISAs are different and whether you need to, or can, have both. SIPPs and ISAs are both tax-efficient investment accounts but there are a few key differences.

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How much you can put in

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You can currently add £20,000 into an ISA each tax year. But with SIPPs, the annual allowance works differently. Most savers can add up to 100% of their earnings or £60,000 (whichever is lower) to pensions in a year and benefit from the tax efficiencies.

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You can add more than this to a SIPP, it just won’t attract the same tax relief and you could face a tax charge.

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Tax-efficiency

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SIPPs attract tax relief when you make contributions. An ISA doesn’t.

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This boost means you could invest the same amount in an ISA and SIPP and end up with a bigger initial pot in your SIPP.

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Taxes you could pay

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Inside both an ISA and a SIPP your investments have the chance to grow free from UK taxes. That means any dividends are free from income tax and any profits free from capital gain tax.

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Where they differ is when you take your money out.

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Any withdrawals from an ISA are tax-free. But a SIPP only allows you to withdraw 25% of your account tax-free, the rest will be subject to income tax. That’s because, with an ISA, you’ve initially contributed from your post-tax pay. In a pension, you’ve got the tax relief upfront, so pay it later on.

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Accessing your money

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SIPPs are designed for retirement which is why you can’t start taking money out until you’re at least 55 (rising to 57 in 2028).

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With an ISA, there’s no age limit. You can take money out at any time. But once you’ve taken money out of an ISA you will lose your tax-free allowance on that cash.

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How to choose between a SIPP and ISA

Here are few questions to help you decide which is the best option for you, an ISA or a SIPP, or both:

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• Would you like to be able to access your money before 55?
• Are you investing for retirement?
• Is one option more favourable from a tax perspective?

SIPP rules

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Who can open a SIPP?

Anyone under the age of 75 in the UK can open and pay into a SIPP.

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How are your investments taxed?

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In a SIPP, your investments have the chance to grow free from UK tax. So any dividends are free from UK income tax and profits free from capital gains tax.

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How much can you pay into a SIPP each year?

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Most of us can put up to 100% of our earnings or £60,000 (whichever is lower) into pensions each year. The allowance includes both workplace and personal pensions.

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These annual allowances are set by the government and can change each year. And again don’t forget, you can add more than this to a SIPP, it just won’t attract the same tax relief and you could face a tax charge.

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When can you take money out of a SIPP?

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You can’t access money paid into a pension until you reach age 55 (or 57 from 6 April 2028).

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SIPP lifetime allowance

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The lifetime allowance was the maximum amount you could save into a pension without needing to pay additional tax. This allowance was set at £1,073,100 until it was ended on 5 April 2024.  

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Paying into a SIPP

Each year the UK government sets allowances on how much we can each contribute to a pension and still get tax relief.

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SIPP annual allowance for 2024-25

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Most savers can put up to 100% of their earnings or £60,000 (whichever is lower) into pensions each year. So this allowance includes both workplace and personal pension contributions.

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There are a few different scenarios when your annual allowance might be different. For example, low or high earners and anyone who has already accessed their pension. 

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💡 Check out our pension tax relief guide to understand how much money you can put into a pension. 

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SIPP tax relief

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When you add money to your pension, the government adds money too. It does this via tax relief.

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Most savers get at least 20% (basic rate income tax) in tax relief and with a SIPP, this is added directly into your account.

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For example, if you add £80 to your SIPP, your SIPP provider will collect £20 (i.e 20% tax relief) from the government and add it into your SIPP account. Making your total pension contribution £100.

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If your income tax rate is more than the basic rate of tax you can claim further tax relief yourself.

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You can put up to 100% of your salary into a pension and get tax relief on it but if you put more than your relevant Annual Allowance there's no tax relief. You’ll also face a tax charge.

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Please remember, any tax treatment depends on your individual circumstances and may be subject to change in future.

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7 steps to opening a SIPP account

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1. Check if a SIPP is the right account for you

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SIPPs are accounts to help you save and invest for retirement, you can’t access your money until you are at least 55 years old, so double check you’re happy with this.

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2. Choose a SIPP provider

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When it comes to choosing the best SIPP provider for your needs we think it’s best to think in terms of two things: features and fees.

For features here are some questions to think about:

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• How experienced an investor are you?
• Do you want to choose your own investments?
• What do you want to invest your SIPP in?
• Would you like your other accounts e.g. ISA in the same place?
• Do you need support in terms of research?‍

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3. Check SIPP fees and costs

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Before deciding which SIPP provider you’d like to go with, make sure you’re clear on how the platform charges you. 

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Here are the fees to understand:

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• Platform charges - how much the SIPP account costs.
• Trading commission - how much it costs to place a trade or invest.
• Foreign exchange fees - how much you are charged to buy overseas investments. 
• Ongoing charges for products like ETFs, investment trusts and funds.
• Exit charges - some providers charge you for leaving.
• Drawdown fees - how much it costs to start taking money out of your SIPP.
  

Charges can have a real impact on your investments over time especially if investment performance is not doing enough to offset them.

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4. Contribute to your SIPP

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When it comes to saving enough for retirement, habits are key. And one of the most important habits is investing regularly.

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For some, this might mean investing monthly, perhaps in line with a paycheque. But for others, this might be a few lump sum contributions over the year.

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The sooner you start, the sooner your contribution is boosted by tax relief and the more time you are giving your pension pot to grow.

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5. Invest your SIPP

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What’s in your SIPP in your 20s and 30s should look a little different to your 40s, 50s and beyond. Time is on your side when you’re young, particularly since you can’t touch the investments until at least 55 years old (and likely older).

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But as you edge closer to retirement age and working less, you’ll likely need a bit more certainty when it comes to the value of your SIPP investments and the income they could provide.

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That’s why we tend to see a shift from share heavy SIPPs in the earlier years like your 20s, 30s and some of your 40s but a shift towards assets that tend to hold their value in the short term like cash or bonds as people get closer to using their SIPP.

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💡To learn more about this, take a look at our pension investment strategies for 20s and 30s or 40s and 50s.

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6. Combine old pensions in a SIPP 

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These days every new job brings with it a new pension pot. And as we’re all moving jobs a lot more, lost pensions are a real and growing problem.

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When it comes to a pension we need to know where it is, what it’s invested in and how it’s growing.

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Check out our guide on how to find old pensions and learn how a pension tracing service could help. Once you’ve found your old pensions, you can then decide what to do with them.

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A SIPP is an account that lets you transfer pensions and combine them. People tend to do this to get a clearer picture of things like performance and costs, reduce admin and to start making the investment decisions themselves.

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Before starting any pension transfers think about:

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• Any difference in ongoing costs
• Whether you’ll lose any benefits your current scheme offers like guarantees (which offer you a certain guaranteed income for life)
• If you’ll be charged anything for leaving your current provider

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7. Check in on performance 

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You can’t access the money in your SIPP until 55 (57 in 2028) but it is important not to wait until then to see how your SIPP has performed.

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Check in every year or so to see how your SIPP investments are performing and whether you are on track to reach your retirement goals. Don’t forget to keep the lifetime allowance in mind too.

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How to open a SIPP with Freetrade

A SIPP is included as part of the Plus plan for just £11.99 per month, or £119.88 per year, giving you access to everything Freetrade has to offer.

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Invest in the full range of 6,100+ stocks and ETFs, use limit orders and stop losses to manage your trading, and earn 5% AER on up to £3,000 uninvested cash. The Plus plan also includes a tax-efficient stocks and shares ISA.

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Learn more about Freetrade Plus.

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What can I invest in with a SIPP?

Compared to other personal pensions, SIPPs tend to be chosen for their flexibility when it comes to what you can invest in. 

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How to pick SIPP investments 

Any investments we make should be guided first and foremost by what we are trying to do. And one of the main jobs of a SIPP is to help us build up a pension pot to live off later in life.

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Given this, it can be a good idea to think about SIPPs as having a few different stages in life.

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Stages focussed on growing your pension pot and stages where you are about to or start to use your SIPP. 

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The key bit here is that your SIPP investments should look a bit different during the different stages.

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Investments for building your SIPP

There’s usually a gap of a least a few decades between when people open a SIPP and start using it, so it’s a good idea to focus on investments aimed at growth over this time.

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Shares are a good place to start. Think about building a portfolio made up of growing firms in growing sectors, across the globe.

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If you don’t want to choose the shares in the portfolio yourself you could always opt for ready-made options like ETFs or investment trusts.

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Investments for using your SIPP 

When you are edging closer to using some of your SIPP. This is a time when you’ll need more certainty about what the value of your SIPP will be.

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This means you’ll likely need a higher dose of investments that hold their value in the short to medium term (ie. don’t follow the ups and downs of the stock market too closely) or investments that can provide a reliable level of income. 

Looking for dividend-paying shares is one option but other possibilities include income focussed real estate investment trusts (REITs).

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And for investments that should really hold their value in the short term. Bonds or a higher level of cash could be useful things to investigate.

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💡 For more ideas take a look at:

‍How to invest in stocks

Popular SIPP stocks

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Popular SIPP investments 

Diversification

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ETFs can be a key component of SIPPs and index tracking ETFs in particular.

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These index ETFs track a large set of stocks, so are a simple way to diversify your portfolio. ETFs are often designed to track the market, making them a good bet for a long-term investment.‍

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S&P 500 and All-World index ETFs are popular with clients.

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Global

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When it comes to stocks, SIPP investors have gone global. With tech companies from China and the US, to established banks, insurers and miners closer to the UK.

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Going global gives you the best opportunity to capture growth, as a lot of it happens outside of the UK.

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‍Industries old and new 

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SIPPs tend to hold both established blue-chip players known for their dividend-paying heritage and some of the fastest-growing companies on the planet shaking things up in their relevant sectors. E-commerce, computer chips and even new HR innovations are in there. 

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How your investments taxed inside a SIPP

A key benefit of a SIPP is tax efficiency. 

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‍1. Tax relief

As we’ve seen, tax relief is the government’s way of topping up or adding to your pension contribution. This is where SIPPs stand out, you won’t get tax relief top-ups in other investment accounts, like an ISA.

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2. Tax wrapper

A SIPP is a tax wrapper. This means inside a SIPP your investments grow free from UK tax.

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3. Inheritance tax

When someone dies SIPP funds do not generally form part of their estate and this means they can be passed on free from inheritance tax.

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SIPP taxes 

There are a few taxes SIPPs won’t protect you from.

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1. Stamp duty (SDRT)

This is a 0.5% charge, paid and deducted at the time you buy a UK stock, with the exception of AIM stocks and some ETFs. You do not pay stamp duty on US stocks.
 

2. Withholding tax on US dividends

The US Government charges non-US residents a 30% tax on any income received from US investments. Thanks to an agreement between the UK and the US, UK residents can generally reduce this tax to 15%.
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To do this you’ll need to fill in a W-8BEN form, which declares you’re not a US tax resident. If you’re a Freetrade customer we’ll prompt you to fill it in in-app.

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Taking money out of your SIPP

You can start taking money out of your SIPP when you reach 55 (or 57 from 6 April 2028). But this doesn’t mean you have to take money out then.

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Here’s a brief overview of your options when you reach this point:

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1. Retire later and keep contributing

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Given we are all living and working longer, many people are delaying dipping into their SIPPs.

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Generally, you can continue to keep building up your SIPP and benefit from tax relief until age 75.

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👆🏻If you haven’t touched or taken any money from your SIPP yet, you can still contribute up to the standard annual allowance. But once you’ve started taking money from your pension, you will only be able to contribute up to £10,000 (because you’ve triggered something called the MPAA or Money Purchase Annual Allowance).

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2. Arrange guaranteed retirement income (an annuity)

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Annuities are products that will pay you a fixed level of income in return for an upfront fee. Some annuities will only last for a fixed period of time. Others will pay out until your death.

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As an example, you might pay £50,000 to buy an annuity that pays out £6,500 per year for ten years.

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Annuities are good for people that want a secure source of income, you know what you’ll be getting and can plan accordingly. 

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The downside is that they are quite a rigid product. The income they provide is guaranteed, regardless of the stock market’s growth or drop. You also can’t stop or start the income, you’ll get your payment whether you want it or not.

3. Have flexible income in retirement (pension drawdown)

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Going into drawdown is a way that you can take your tax-free cash (up to 25%) and keep the rest of your SIPP invested for later. It’s a popular option as it allows your SIPP to stay invested. 

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If you delay retirement or just don’t need to use your SIPP as a source of income at 55 (or 57 from 6 April 2028), your SIPP could still benefit from stock market growth. That being said it will also be hurt by stock market drops, so there’s more risk with drawdown, your income won’t be secure (like with an annuity).

4. Take your SIPP as a few lump sums

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Another option is to keep your SIPP as it is and just take out smaller amounts when you need them. 

So long as you haven’t already taken your 25% tax-free lump sum from your SIPP, any smaller cash lump sums you take will be free from tax on 25% and after that, you’ll pay tax according to your level of income on the remaining 75%.

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5. Take your SIPP in one go

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You can withdraw your SIPP as a single cash lump sum.

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You won’t be taxed on 25% of the lump but you will on the remaining 75%, so you’ll have to think hard about whether this is a good option for you.

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The upside is that you’ll have your pension money and can choose what to do with it.

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The downside is that you will lose out on the benefits that come with a pension pot, namely tax-free investment growth and the fact that your funds will be inheritance tax-free if you die.

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You will have triggered the MPAA as we mentioned above too, so your pension annual allowance will drop to £10,000.

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6. Mix your options

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The important thing to remember is that once you hit 55 you have the option to access your SIPP but you don’t have to.

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You also don’t have to pick one option, you could mix and match some of the above.

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For example, you could use a portion of your SIPP to buy an annuity, keep some of your funds invested and withdraw another lump sum as cash.

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Other types of SIPP pensions

The Freetrade pension is a SIPP or self-invested personal pension, giving you control over how your retirement savings are invested.

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It’s worth noting though, there are a few different types offered in addition to the do-it-yourself SIPP.

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Complex SIPPs‍

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These are SIPPs that let you hold a wider variety and often more complex investments in them, like buying and leasing out commercial property.

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Given you can hold non-standard and potentially high risk/return investments, complex SIPPs tend to be more suitable for high net worth and financially sophisticated investors.

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Complex SIPPs tend to be managed by the SIPP provider or a financial advisor directly, instead of you doing it.

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Group SIPPs

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A group SIPP as the name suggests is where a number of SIPPs are grouped together. The most common example is a ‘workplace SIPP’, which most of us will have if we are employed by a company. This means it allows for contributions and payroll deductions from your employer.

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Although your SIPP is held as part of a group, you are free to manage your own SIPP and what it’s invested in, if you’d like to.

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SIPP FAQs

Can I have more than one SIPP?

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Yes. You can have more than one SIPP. Your annual and lifetime tax allowances, however, remain the same. So if you had two SIPPs and the annual allowance was £60,000, your contributions to both accounts would still be subject to the £60,000 annual allowance.

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Can you cancel or close a SIPP?

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You can only cancel or close a Freetrade SIPP (or any SIPP for that matter) within the first 30 days of opening it. After this point, your SIPP cannot be closed and the pot of money you’ve built up will be preserved until you reach the age at which you’re allowed to access your pension (currently 55 but rising to 57 from 6 April 2028). You can still transfer your Freetrade SIPP to another provider at any point if you’d like to.

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To cancel your Freetrade SIPP, you should let us know through the in-app chat on the Freetrade app within the 30 day cancellation period. When you cancel within the first 30 days we will refund any SIPP fees taken.

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Can a SIPP be inherited?

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A SIPP can be inherited but the process for passing them on is not usually the same as leaving behind any other assets that you own.

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SIPP funds do not generally form part of a deceased person’s estate and so are not divided up according to your will, as lots of other things are.

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SIPP funds are instead paid to your beneficiaries which hopefully you will have named via an ‘expression of wish’ form, which tells the pension provider who to pass your SIPP to and how much. If you haven’t done this, ‘who’ and ‘how much’ will be chosen by your pension provider or the scheme administrator.

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How your beneficiaries will be taxed depends on when you die.

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If you die before you’re 75 and the funds are transferred to your beneficiaries within two years, then they won’t have to pay any tax.

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But if you die after you’re 75, or if you die before then but do not set up your funds to be transferred to your beneficiaries within two years of your death, then they’ll have to pay tax on them.

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The other thing to remember here is that your SIPP is not the same as an annuity or a lump sum of cash. Both of these things would be what you do with money withdrawn from your SIPP, so passing them on would not be the same as it would with a SIPP.

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Who regulates SIPP providers?

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SIPP providers are regulated by the Financial Conduct Authority.

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Are SIPP funds and assets protected?

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With a Freetrade SIPP, any UK-listed stocks or ETFs that you buy are held in the name of the SIPP Trustee by Freetrade Nominees Limited, which holds stocks and ETFs, with you as the beneficial owner. The stocks and ETFs are held in CREST, which is the UK’s central security depository.

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Freetrade Nominees Limited is a non-trading company. That means it can’t run up liabilities of its own and can be shielded from any liabilities that Freetrade Limited accrues.

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All of this is done so that, in the unlikely event of Freetrade failing, the company’s creditors will not be permitted to use your investments to cover Freetrade’s liabilities.

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When you invest in US-listed stocks, we hold them in custody at a third-party SEC-registered broker (the Security and Exchange Commission, which regulates US securities markets).

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Our customers’ stocks are held in a designated customer account at the broker, and cannot be mixed with Freetrade’s own assets or used to settle our debts. Similar to the UK securities being held in CREST, your US stocks are ultimately held in DTCC (Depository Trust & Clearing Corporation). Currently, some customers’ US stocks are still held by Freetrade Nominees Limited in CREST, but we are in the process of fully migrating US stocks to our third-party broker. You can read more about our security features here.

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Important information

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SIPP eligibility rules apply. Tax treatment depends on your personal circumstances and current rules may change. US dividends received into your SIPP may be subject to US withholding tax. Pensions that are transferred to the Freetrade SIPP may lose the protected pension age benefit. This means that you will not be able to draw the monies from the Freetrade SIPP until you are aged 57. Please ensure you know what this means for you and the effect it may have on you and your savings.

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Check before you transfer a pension to us that we can accept your investments, you won’t lose any guarantees, and that you know what charges you may incur. Seek advice if you are unsure about making a transfer.

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A SIPP is a pension designed for you to save until your retirement and is for people who want to make their own investment decisions. You can normally only draw your pension from age 55 (57 from 2028), except in special circumstances.

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At present, Freetrade only supports Uncrystallised Fund Pension Lump Sums (UFPLS) for customers who wish to withdraw funds from their SIPP after their 55th birthday. We strongly encourage you to seek financial advice before making any withdrawals from your SIPP.

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