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A SIPP, or Self Invested Personal Pension, is a tax-efficient pension scheme designed to help you grow your retirement pot, with the aim of providing you with an income in retirement. You can choose from a wide range of funds, investment trusts, shares and exchanged traded funds (ETFs).
One of its main features is that you can get tax relief on your contributions. How much you get will depend on the level of your income. SIPP providers reclaim basic rate tax relief (currently 20%) on your contributions and automatically add this to your SIPP. If you pay tax at higher than the UK basic rate, you can claim additional tax relief from HM Revenue & Customs, reducing your tax bill for the year.
There are limits to the amount that you can pay into pensions each year, while still benefiting from tax breaks. If you exceed these, you’ll usually have to pay tax charges. For most people, the annual allowance is currently £40,000 per year, but for a small group, the annual allowance can be reduced (see Tapered or Money Purchase annual allowance below). In some cases you can carry forward unused allowances from previous years.
As well as limits on how much you can pay in with the benefit of tax relief, there’s also a limit on how much you can build up in pensions overall without suffering an extra tax charge. This is called the ‘Lifetime Allowance’, and it’s currently £1.073 million.
The lifetime allowance applies to the total value of all your pensions (including the value of pensions promised through defined benefit schemes), but not including State Pensions.
Each time you start to take benefits from a pension scheme, the value of those benefits are compared against your available lifetime allowance. A check is also done if there’s a lump sum pay-out if you die before you reach the age of 75.
If you have pensions from which you haven’t started to take benefits by the time you reach age 75, a check will always be done at that point.
Benefits can currently be drawn from a SIPP from the age of 55 although this is expected to rise to 57 in 2028. There are a number of options for drawing your pension benefits. You can, for example: