What is a SIPP and how does it work?

What’s a SIPP?

A self-invested personal pension (SIPP) is a type of pension offered to UK residents for more control over what they invest in when saving towards their retirement. You can build your retirement in a tax-efficient manner by investing in a range of markets.

A SIPP can be an effective alternative to a private pension scheme and potentially offers lower fees by avoiding management charges. Additionally, you can consolidate your pensions, if you have more than one, combining them into one accessible low-cost account. Through the help of an online broker like us, you’d build your pension by choosing from a wide range of investments like individual shares, funds or ready-made portfolios.

To be eligible to open a SIPP in the UK, you must be under 75 years of age. Note that SIPPs have a fixed investment term, and you usually won’t be able to access your money until you reach at least 55 years of age (or 57 from 6 April 2028).

Typically, younger investors will hold higher-risk portfolios as they’re more insulated against the effects of economic cycles owing to longer time horizons. Conversely, older investors tend to favour less volatile investments that will provide a steady income at retirement.

Since markets can go up as well as down, you’ll need to balance your portfolio in accordance with your risk appetite. You’ll need to take steps to manage your risk effectively, as there’s potential of getting less than what you put in as your retirement income.

Types of pensions

There are different types of pensions that you can choose from in the UK. Over time, you may accumulate a combination of them if you move jobs.

Why choose a SIPP?

Get greater flexibility on your retirement

A SIPP provides a more flexible way to save for your retirement compared to a state or workplace pension. There’s increased flexibility in terms of what you can invest in and the time horizon for reaching your financial goals. With us, you can choose from over 13,000 shares, exchange-traded funds (ETFs) and investment funds, whereas a workplace pension might only allow you to invest in a handful of funds.

Choose from a wide range of investment options

You can pick from a variety of investment options that suit your risk profile and financial goals. The asset classes you can get exposure to include stocks, ETFs, exchange-traded commodities (ETCs), real estate investment trusts (REITs) and investment trusts. You can also choose a portfolio that has a combination of these asset classes to spread the potential risk across different sectors and geographies.

Control your pension

Between the different pension funds currently available, a SIPP offers you the most control over where you can invest. With a share dealing SIPP, you can actively invest in assets you want and make changes as often as you like. As an alternative, you can use a ready-made Smart Portfolio SIPP that’s tailored to your investment goals.

Get tax benefits

Your SIPP investment works as a tax wrapper, with certain tax benefits that aren’t available with other pension funds.

Tax relief³

Your contributions may be eligible for tax relief, based on the rate you pay – so, you can get refunds from the government. Basic rate taxpayers receive 20% tax relief on contributions into a SIPP, while higher rate taxpayers can claim an additional 25% tax top-up via their tax returns.

If you put £5,000 towards your SIPP as a basic rate taxpayer, for example, the government will contribute £1,000 towards your retirement.

25% tax-free entitlement at retirement³

When you reach retirement age – which is currently 55 (57 from 2028) – 25% of your pension fund will be tax-free, while the rest will be subject to tax.

You can take up to 25% of your contributions as a tax-free lump sum; the rest will be taxed as income. You can choose when and how you’d like this paid: as a single lump sum payment or a series of payments – this includes a regular income by buying an annuity or through income drawdown.

What can you invest in?

With a SIPP, you can choose from a range of investments, including individual shares and funds:

• Individual shares – shares of a stock represent units of ownership in a company
• ETFs – investment instruments that track the performance of an existing market or group of assets in a single position
• REITs – companies that own, operate or finance income-producing properties
• Investment trusts – public limited companies (PLCs) that generate income from buying and having a stake in other companies

SIPP rules

Before you set up a SIPP, it’s important to understand the specific rules associated with this type of investment. We’ve highlighted some of the most important rules below.

Please remember: any tax treatment depends on your individual circumstances and may be subject to change in the future.

How to set up an account with us

1. Open a share dealing or Smart Portfolio account
2. Add a SIPP account through the My IG dashboard
3. Set up your SIPP plan with Options UK
4. Fund or transfer your SIPP at Options UK
5. Select your investments

1. Open a share dealing or Smart Portfolio account

Create an investment account with us to put money towards your retirement savings. You can choose between opening a share dealing account – where you’ll personally choose the asset classes you want to get exposure in – or IG Smart Portfolios, which are handled by our expert wealth managers. You can open your account through our website or award-winning mobile app,⁴ whichever is more convenient for you.

2. Add a SIPP account through the My IG dashboard

Once you’re on the My IG dashboard, you can add your SIPP to the account you created.

Here, you can pick between our share dealing SIPP and our Smart Portfolio SIPP, or opt for both.

3. Set up your SIPP plan with Options UK

You’ll receive an invite from Options UK prompting you to set up your SIPP plan via their website. Options UK is an independent body that provides specialised pension products and services to UK clients. When you’ve set up your plan, Options UK will let us know and we’ll then activate your SIPP account.

4. Fund or transfer your SIPP at Options UK

Options UK can accept transfers from any locally registered pension scheme or recognised overseas pension scheme. You can also set up regular contributions or make one-off lump sum contributions.

5. Select your investments

Depending on the SIPP you choose, you’ll either pick the investment type you want to get exposure to through share dealing or have it done on your behalf via a ready-made portfolio (IG Smart Portfolio). If you choose a share dealing SIPP, you’ll be able to invest in over 13,000 shares, funds and investment trusts. Alternatively, you can choose one of our ready-made portfolios that can help you achieve your retirement goals via our Smart Portfolio SIPP.