We explain the intricacies of SIPP pensions from allowances to tax considerations and employer contributions
Self-invested personal pensions (SIPPs) have been around since 1990 but have evolved over that time.
While they offer a huge range of investment options and real flexibility, there are some rules you need to get to grips with around allowances, withdrawals, employer contributions, and what happens after you die.
1.What is a SIPP?
Self-invested personal pension are a type of personal pension where 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.
2.How much does a SIPP cost?
There are a few charges to be aware of when opening and building up a portfolio within a SIPP.
There’s an overall platform charge, which can be a flat fee or based on a percentage of the value of the pension.
Some providers vary the percentage fee depending on the size of the pension – so for larger portfolios, a smaller percentage is taken.
There may also be a cap on these charges – depending on the assets held.
There will be charges for any funds held inside the pension.
These vary significantly, with lower charges for things like index funds and higher charges for actively managed funds.
There are no fees on held shares, investment trusts or ETFs.
On top of that, there will be trading costs whenever buying or selling shares or funds.
However, for regular investors into selected investments, there may be no trading charge for that and it will differ between providers.
3.What is the SIPP allowance?
The annual allowance is how much can be paid into your pension tax-efficiently and the rules are the same as any other kind of pension.
If you make over £60,000, the annual allowance is capped at £60,000.
Everything contributed to the 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, there is a £3,600 allowance each year.
- What is carry forward on the annual allowance?
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 cannot 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.
- What is SIPP drawdown?
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.
- What are the SIPP withdrawal rules?
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.
On cash withdrawals from a SIPP, the standard rules apply so from the minimum pension age, which is 55 at the moment, rising to 57 in 2028.
After that it will stay 10 years below the state pension age.
Once you’ve taken your tax-free lump sum, you can buy an annuity or 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.
As with any other defined contribution pension, when you take drawdown income or a pension lump sum, you trigger the money purchase annual allowance (MPAA).
This reduces your annual allowance for contributions to £10,000 a year.
The idea is to stop people 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 starting to draw money from any pension.
- Can I transfer my pensions to a SIPP?
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 cannot hold the same investments, it’s not a deal-breaker: you can sell up and transfer as cash, but be aware you will be out of the market while the transfer takes place, so will not benefit from any growth during that time.
- Can I have a SIPP and a workplace pension?
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.
- Can my employer contribute to my SIPP?
Yes, it is just a question of whether they are 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.
Employers can make contributions to a SIPP via 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.
- What happens to my SIPP when I die?
You can leave your SIPP to anyone you choose – or a number of people, split in any way 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 will not, 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 (IHT). After that, they will be brought into the IHT net depending on the size of the estate.
Contact our specialist tax advisory and HMRC enquiry service at KKVMS.