UNDERSTANDING SELF-INVESTED PERSONAL PENSIONS (SIPPs)

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A Self-Invested Personal Pension (SIPP) is a flexible, tax-efficient way to build a retirement fund. Unlike traditional pensions, a SIPP puts you in control — allowing you to choose your provider, decide how much you contribute, and determine how your pension is invested. It’s designed for individuals who want greater control over their retirement planning, including the option to manage investments personally or delegate this to their provider.

How a SIPP Works

SIPPs are a type of defined contribution pension. The size of your pension pot at retirement depends on how much you contribute, how your investments perform, the fees charged by your provider, and when and how you access your funds. SIPPs offer a wide range of investment options, and your money is expected to grow over time, although returns are not guaranteed.

Tax Relief and Contribution Limits

One of the key advantages of a SIPP is tax relief. The government automatically adds 20% to your contributions — meaning a £100 investment costs you only £80. Higher-rate taxpayers can reclaim an additional 20% via self-assessment, making a £100 contribution potentially cost just £60. You can contribute up to £60,000 per year or 100% of your UK relevant earnings, whichever is lower.

Accessing Your Pension

You can access your SIPP from age 55 (rising to 57 in 2028). Up to 25% of your pension pot can be withdrawn tax-free. The remaining funds can be left invested, converted into a guaranteed income, used to set up a flexible income you can adjust at any time, or taken as one or more lump sums. Withdrawals beyond the tax-free portion are taxed as income.

A Tax-Efficient Withdrawal Strategy

For example, a £60,000 pension pot can be withdrawn over six years using a mix of 25% tax-free cash and the standard personal allowance of £12,570. Assuming no other income, this strategy results in the entire pot being accessed tax-free, providing a simple and highly efficient retirement income plan.

Conclusion

SIPPs offer flexibility, investment choice, and powerful tax benefits. With the right strategy, they can provide a secure and efficient route to retirement, tailored to your individual financial goals.