In the world of pensions and all of the jargon that comes with it, one which you may have come across is a “SIPP”, or self-invested personal pension, to give it its full name.
SIPPs are a highly tax-efficient way to save. From a tax perspective SIPPs work in the same way as other types of UK registered pensions, which we would generally describe as “Exempt-Exempt-Taxed”. This means relief from income tax is usually available at an individual’s highest marginal rate on money paid in. Investments held within the SIPP also grow free of Capital Gains Tax, providing a significant boost to returns over a reasonable time horizon. When you come to draw on the SIPP, up to 25% can be taken as a tax-free lump sum, but income tax is then applied on the remainder. Given their tax-efficiency, SIPPs are subject to the same limits as other pension schemes when it comes to how much can be paid in each year (currently the lower of your total earnings for the 2025/6 tax year or £60,000) and how much is available tax-free at retirement (or on death).
Flexibility in pension drawing and investment
What separates SIPPs from other pensions is their flexibility when it comes to drawing on a pension. SIPPs often allow for retirement to be phased, with no requirement to buy an annuity when retirement benefits are taken – unlike with some pension schemes. A SIPP is also flexible from an investment perspective, potentially allowing investment into a wide range of asset classes (including within a portfolio that is managed by a discretionary investment manager) – this can include individual stocks, shares, and bonds and unlisted shares, gold bullion and commercial property. The latter is a popular option for business owners as their pension scheme can be the landlord for their company,
and SIPPs are able to take out a commercial
mortgage (up to 50% of the scheme value) in
connection with this.
Types of SIPPs
Not all SIPPs are created equal though, particularly when it comes to available investment options, and broadly these may fall into three categories.
- At the most basic level we have a ‘platform’ SIPP. These are offered by investment platforms (also known as fund supermarkets), and investment is limited to individual stocks and shares and collective funds. They are predominantly aimed at DIY investors who are looking to choose their own investments, with the platform offering the online functionality to trade.
- At the other end of the spectrum there is a full, bespoke SIPP. These are open-architecture pensions that will often allow investment into the full range of what is allowable under pension rules. They can hold multiple assets at any given time and may have their own bank account to facilitate money in and out of the SIPP. They are offered by specialist SIPP providers, who carry out all of the administration that comes with running the SIPP ‘wrapper’. (e.g. reporting to HMRC, administering a payroll).
- Sitting between the above we have what is often called a SIPP-lite, which are in effect a slimmed down version of the full SIPP. Typically, this will include one portfolio with a single investment manager, plus a bank account. They are aimed at investors who do not need all the bells and whistles of a full SIPP and consequently will come with a cost saving compared to the bespoke offering.
When you come to draw on the SIPP, up to 25% can be taken as a tax-free lump sum.
It is not uncommon that people will accumulate numerous pension plans over a working career. Consolidating them into a SIPP can be a popular option to provide greater clarity and oversight of available pension funds: this is often particularly helpful as retirement approaches. Pensions are currently exempt from Inheritance Tax (IHT), but there are government plans to subject pensions to IHT from April 2027. With personal representatives expected to gather data and pay any tax due on an individual’s pension within 6 months of their date of death, having one SIPP instead of multiple pensions may ease the burden a little during an already difficult time.
At JM Finn, clients will often appoint us to manage their pension assets via a SIPP that can sit alongside their other portfolios (such as ISAs or General Investment Accounts). This can be managed to take account of individual objectives, time horizon and risk appetite, as part of an overall holistic financial plan. Clients also have access to our Wealth Planning team, who advise on a range of financial planning matters, including pensions and SIPPs. If this is something which may be of interest, your Investment Manager can provide further details.
The information provided in this article is of a general nature and is not a substitute for specific advice with regard to your own circumstances. You are recommended to obtain specific advice from a qualified professional before you take any action or refrain from action.
