Pensions - Articles - 15 of the most common SIPP questions answered

Sarah Coles, head of personal finance at AJ Bell, comments: “Since their launch in 1990, self-invested personal pensions have changed significantly. Nowadays they appeal to huge numbers of people looking for the flexibility they need to take control of their pension. However, there are still millions of people who have yet to get to grips with what they have to offer, so it’s worth exploring the most common questions and answers.”

 

“It stands for self-invested personal pension, and is a type of personal pension. You pay into the scheme, the government adds tax relief, and then the money is invested to create a pot in retirement. However, SIPPs offer a much bigger range of investment options than other personal pensions. Providers differ, but you may be able to invest in thousands of funds, investment trusts, shares, exchange traded funds, bonds and gilts.”

 

“There are a few charges to be aware of when opening and building up your portfolio within a SIPP. There’s an overall platform charge, which can be a flat fee or can be based on a percentage of the value of your pension. Some providers vary the percentage fee depending on the size of your pension – so for larger portfolios, a smaller percentage is taken. There may also be a cap on these charges – depending on the assets you hold.

 

“You’ll also pay the charges of any funds you hold inside the pension. These vary significantly, with lower charges for things like index funds and higher charges for actively managed funds. If you hold shares, investment trusts or ETFs, you’re not charged a fund fee. On top of that, there will be trading costs whenever you buy or sell shares or funds. However, if you are investing regularly into selected investments, there may be no trading charge for that and it will differ between providers.”

 

“The annual allowance is how much you can pay into your pension tax-efficiently and the rules are the same as any other kind of pension. For most people, your annual allowance matches your total pay for that year – including salary but also bonuses, commission and overtime. If you make over £60,000, your annual allowance is capped at £60,000. Everything contributed to your pension counts towards this – whether it’s you, your employer, or someone else. “There are some exceptions to this. If you’re not earning at all, you’re given a £3,600 allowance each year.”

 

“Carry forward allows you to use unused allowances from the previous three years – if you didn’t use your full allowance for that year. However, in the year you’re using carry forward, you still can’t pay in more than that year’s earnings. So, for example, if you have £50,000 of unused allowances from the past three years, and you earned £80,000 this year, you could carry forward £20,000 and pay in a total of £80,000. Bear in mind that you will need to have been a member of a pension scheme during the years that you’re carrying forward.”

 

“This is one way to take money from your pension after the age of 55. When you move into drawdown within your SIPP, you take 25% of the money as a tax-free lump sum, and the rest of it remains invested. You can then draw an income directly from it.

 

“You can move it all into drawdown at the same time and take the full 25%. Alternatively, you can do it in chunks, and take 25% of each chunk as you go. This can be sensible if you don’t need all the tax-free cash immediately.

 

“Drawdown has the advantage that your money stays invested, so it can continue to grow. You also have real flexibility over how much you can draw from the pot, and when, so you only take what you need and retain the flexibility to take one off lump sums. However, you need to manage how you draw this income, so it lasts as long as you need it to. You may also want to manage how much income you take to stay within certain tax thresholds.

 

“The benefits and potential risks are one reason why some people will mix and match drawdown and annuities at various stages of retirement, using different chunks of their pension pot to fund different things.”

 

“There are a few questions people tend to ask about withdrawal rules, such as ‘how much can I withdraw from a SIPP tax free?’ The answer is the same for the vast majority of all pensions – up to 25% of the total pot.

 

“They might also ask, ‘can I withdraw cash from my SIPP at any time?’ The answer is that you can, as soon as you have reached the minimum pension age. This is 55 at the moment, rising to 57 in 2028. After that it will stay 10 years below the state pension age, so whenever the state pension age rises, the minimum pension age will too.

 

“More generally they may ask about how they can withdraw money from their pension. This is the same as most personal pensions. Once you’ve taken your tax-free lump sum, you can buy an annuity or you can move into drawdown. Alternatively, you can take pension lump sums – of which 75% is taxable and 25% is tax free. (The official name for these is uncrystallised funds pension lump sums, or UFPLS.) You can take a single lump sum or a series of them, and leave the rest invested for potential growth, or you could take the whole pot – although you need to consider the tax implications.

 

“The other rule to get to grips with is that as with any other defined contribution pension, when you take drawdown income or a pension lump sum, you’ll trigger the Money Purchase Annual Allowance (also known as the MPAA). This reduces your annual allowance for contributions to £10,000 a year. The idea is to stop you from withdrawing pension money and ploughing it straight into another pension, to benefit from another round of tax relief. There are some exceptions to this rule – so it’s worth checking before you start drawing money from any pension.”

 

“Yes, you can transfer most types of pensions into a SIPP, including workplace pensions. However, before you do, you need to consider a few things.

 

“Check whether there are any valuable benefits attached to your old pension. If it’s a defined benefit pension, it’s usually not a good idea to transfer and if it’s a defined contribution pension with a guaranteed annuity rate, you may also want to stay put. Check for exit charges too, especially on older pensions.

 

“Have a look at the investments held in your other pensions too, and whether they can be held by your chosen SIPP provider. You can check in with the SIPP company first. If they can’t hold the same investments, it’s not a deal-breaker: you can sell up and transfer as cash, but be aware you’ll be out of the market while the transfer takes place, so won’t benefit from any growth during that time.”

 

“Yes. You can hold and pay into multiple pensions at the same time, as long as you don’t go over your annual allowance. Before you do this, check if you can get more from your employer buy paying extra into your workplace pension. If they match additional contributions, it can be a very sensible option. Then once you’ve exhausted all they’re prepared to match, you can pay into your SIPP. Workplace pensions may have a very restricted range of investments, so having a separate SIPP gives you much more flexibility.”

 

“Yes, it is just a question of whether they’re prepared to. When you’re automatically enrolled into a pension at work, they’ll have chosen a pension for all payments to go into. If you just opt out and pay into a SIPP instead, you’ll lose valuable employer contributions, so it’s worth asking if they’ll pay into the SIPP rather than the workplace pension pot. If they will, you’ll still need to opt out, but this way the employer contributions will go into your SIPP. The auto-enrolment rules mean that after three years you’ll automatically switch back into the employer’s main scheme, so you’ll need to go through the same process again.

 

“People also ask, ‘how can I get my employer to make contributions to my SIPP?’ They can use a bank transfer or direct debit, or they can pay a lump sum or make regular contributions. For regular contributions they need to complete an employer monthly contribution form. If they’re paying a lump sum, you can make a single payment request, the provider will do some checks on your employer, and then give you payment details to give to your employer, so they can pay in.”

 

“They both have advantages, so it’s a case of getting to grips with what each has to offer as well as which account aligns with your investment goals. In many cases, paying into both accounts will be a good option.

 

“SIPPs offer income tax relief on the way in, so you get a 20% top-up from the government paid directly to your SIPP. If you’re a higher rate or additional rate tax payer, you can claim a further 20% or 25% via your tax return. Your investments then grow free of tax, and when you withdraw, you can take 25% of the pot tax-free. The tax relief is why pensions may often be a sensible first port of call for retirement savings, especially if you’re keen to manage your income tax bill.

 

“ISAs don’t have tax relief on the way in, but growth is tax free and there’s no tax to pay on withdrawals. The other big advantage of the ISA is flexibility. The Lifetime ISA has more restrictions, but with any other kind of ISA you can make withdrawals at any time, whereas in a SIPP you can’t access the money until you’re 55 (which is rising to 57 in 2028). It’s why people will often hold ISAs alongside their SIPP, to give them flexibility to withdraw cash before they reach retirement age and tax-free withdrawals throughout retirement.”

 

“You can apply online with just your National Insurance number, debit card details and information about any pensions you want to transfer in. If your employer is going to pay in, you may need their details to hand too. Once you’ve filled out the form, you can pay in a lump sum with your debit card and make regular monthly contributions. Before you do this, you should get to grips with how SIPPs work, including the terms and conditions and the charges. You can do this without help, but if you’re unsure and need support, a financial adviser can help you understand if it’s right for you.”

 

“You’ll usually have a huge array of investment options within a SIPP. It will depend on your provider, but you should be able to choose from thousands of funds, investment trusts, UK and overseas shares, exchange traded funds, bonds and gilts. If you’re unsure where to start, check if your provider has an option for people in your position, such as a ‘ready-made’ pension. They may have a managed fund that’s designed to be the core of a pension portfolio. You can then build on it with investments tailored to your needs.”

 

“You can leave your SIPP to anyone you choose – or a number of people, split in any way you like, by filling in a ‘nomination of beneficiaries’ form. If you have nominated a spouse, civil partner or any children under the age of 23 (or anyone financially dependent on you – including older children with disabilities), they will usually be able to choose whether to take it as a lump sum or leave it in the pension.

 

“The pension provider has discretion over whether to follow the instructions on the form. It’s very rare that they won’t, but if, for example, you haven’t updated the form since you divorced and remarried, they may be prepared to pay out to the new spouse.

 

“If you’re under the age of 75 when you die, the payments are tax-free. If you are over the age of 75, they will usually pay income tax when they withdraw it. Until April 2027, all pensions are free of inheritance tax. After that, they will be brought into the IHT net – although most people will still not have a large enough estate to have to worry about inheritance tax.”

 

“These are pensions for children under the age of 18, which are opened and managed on behalf of the child. Like an adult SIPP, they can invest in a huge range of options, including thousands of funds, shares, trusts, ETFs, bonds and gilts. They grow free of tax, and they also get tax relief on contributions. When they turn 18 it becomes an adult SIPP, so they are in the driving seat, although they can’t access the money until the minimum pension age (currently 55, but set to rise to 57 in 2028 and keep rising in step with the state pension age beyond that).

 

“People frequently ask ‘what is the Junior SIPP allowance?’ The answer is that you can pay in up to £2,880 a year. They also ask ‘Does the government top up a Junior SIPP?’ The answer is yes, they top it up with tax relief at 20% – even though most children don’t pay tax. It means up to £3,600 can go into a Junior SIPP every year.”

 

“A parent or legal guardian can open a Junior SIPP, although if they’re over the age of 16, the child may need to sign a form. Anyone can pay into it, up to £2,880 per year, although the person who opened it up will need to make the investment decisions.”