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What is a UK SIPP?

UK SIPPIn the United Kingdom, a Self-Invested Personal Pension (SIPP) is a government-approved personal pension scheme. Through a SIPP, the individual can select among many different investment options approved by HM Revenue and Customs (HMRC).

 

Saving in a SIPP comes with tax rebates on contributions, but also with limited accessibility to saved assets.

Investment options

Compared to saving in a Personal Pension Plan, saving in a SIPP will give you a more diverse selection of approved investment choices.

 

Examples of asset types allowed in a SIPP and that are not subject to a tax charge:

Asset Requirements
Listed and unlisted shares
Options Must be traded on a recognised exchange
Futures Must be traded on a recognised exchange
Contracts for Difference
Traded endowments policies
Deposits
Deposit interests
Gold bullion Must be investment grade
Authorised UK unit trusts
Authorised open-ended investment companies
Authorised UCITS funds
Unauthorised unit trusts The trust is not allowed to invest in residential property
Investment trusts Must be subject to FCA regulation
Unitised insurance funds from EU insurers and IPAs
Commercial property
Ground rents Ground rents must not contain any element of residential property

Taxes

Contributions

The SIPP provider will claim a tax refund at the basic rate on behalf of the customer. When the provider gets your refund, it is added to your savings. For the tax year 206/2017 the basic rate was 20%.

 

Contributions are, at the time of writing, limited to £3,600 (£2,880 before the tax refund) or 100% of earned income (if higher).

 

Employer contributions are usually allowable against corporation or income tax.

Yield

Income from assets in your SIPP is not taxed, and any growth is free from capital gains tax.

Pension Commencement Lump Sum

UK SIPP2When you have reached the age of early retirement (at the time of writing, it is set to 55 years of age) you can elect to take up to 25% from your SIPP as a tax-free Pension Commencement Lump Sum. The remaining 75% can be moved into drawdown (if you want it to remain in invested) or used to buy annuity.

 

N.B! Holders in Flexi Access Drawdown can take any amount from their fund from age 55. Pension income is taxed as if earned income in the individual’s highest marginal rate.

 

There are rules in place to prevent people from putting their Pension Commencement Lump Sum back into the SIPP.

Lifetime Allowance

If the fund value exceeds the Lifetime Allowance, the amount that exceeds the threshold will be taxed at 55%. In 2016, the Lifetime Allowance was £1 million.

Structure

When you research available SIPPs, you are likely to come across these four generic SIPP types:

  • Deferred SIPP
  • Hybrid SIPP
  • Pure SIPP
  • SIPP Lite

Deferred SIPP

This is a SIPP where most or all of the assets are held in insured pension funds. Some SIPP providers offer mutual funds instead, to provide direct access.
This type of SIPP is called deferred SIPP since self-investment or income withdrawal activity is deferred until an indeterminate date.

Hybrid SIPP

This is a SIPP where some of the assets must be held in conventional insured pension funds, while the rest can be self-invested. Many of the mainstream personal pension providers offer this solution.

Pure SIPP

Also known as full SIPP. Will give you unrestricted access to many allowable investment asset classes.

SIPP Lite

Investments are placed in one asset only, but it doesn’t have to be as limited as it sounds, because an investment platform or a stockbroker account is classed as a single investment.

 

If an upgrade to a full SIPP in the future is permitted or not will depend on the scheme.