SIPPs explained

A pension is the only place where the government hands you money for saving, then makes you promise not to touch it for decades. A SIPP is the version where you also get to pick what the money is invested in.

This guide covers what a SIPP is, how the tax relief works, the limits, and when you can get at the money.

What a SIPP is

SIPP stands for self-invested personal pension. GOV.UK describes SIPPs as personal pensions that let you control the specific investments that make up your pension fund.

That's the difference from most workplace pensions, where the scheme picks a default fund for you. With a SIPP, you open the account with a provider, pay money in, and choose the funds or shares yourself. It sits alongside any workplace pension; it doesn't replace it.

Choosing your own investments means owning the results. Investments can fall in value as well as rise, and you could get back less than you put in. The FSCS covers up to £85,000 per person, per firm if an authorised firm fails, but it can't accept claims for poor investment performance.

Tax relief: the government's top-up

You can get tax relief on private pension contributions worth up to 100% of your annual earnings. The idea is that money going into a pension is treated as if you'd never paid Income Tax on it.

Basic-rate relief is added for you

When you pay into a SIPP from your take-home pay, you've already paid tax on that money. So the provider claims tax relief from the government at the basic rate of 20% and adds it to your pension pot. This is called relief at source.

In numbers: you pay in £80, the provider claims £20, and £100 lands in your pension. The £20 is the basic-rate tax on £100 of earnings, handed back. You don't need to do anything to get it.

It works even if you don't pay Income Tax. If you have no earnings in a year, you can still get relief on contributions of up to £2,880. At 20%, that's topped up to £3,600.

Higher-rate relief you claim yourself

If you pay tax at 40% or 45%, the provider still only claims the 20%. The rest is yours to claim, and nobody will chase you to do it. You claim it through your Self Assessment tax return.

GOV.UK's example: if you paid 40% tax on £10,000 of your income, you can claim an extra 20% relief on that £10,000 through Self Assessment. In Scotland, where the tax bands are different, higher earners claim an extra 1%, 22%, 25% or 28% depending on their band.

This is the part people most often leave on the table. If you're a higher-rate taxpayer paying into a SIPP and you don't do Self Assessment, it's worth finding out how to claim.

The annual allowance

The annual allowance is the most you can save in pensions in a tax year before you have to pay tax. It's £60,000, and it counts everything paid in by you or anyone else, like an employer, across all your pensions.

A few things can change it:

• Carry forward. You might be able to use allowance you didn't use in the previous three tax years.
• High incomes. The allowance is tapered down if your threshold income is over £200,000 and your adjusted income is over £260,000.
• Once you start taking money flexibly. Take cash from a pension pot in certain ways, like a lump sum from an uncrystallised pot or cash from a flexi-access drawdown fund, and a lower money purchase annual allowance applies from then on: £10,000 a year, counting what you and your employer pay in. Taking only your tax-free lump sum and leaving the rest invested usually doesn't trigger it.

If you go over, you or your pension provider must pay the tax, reported through Self Assessment. For most people, the limit that bites first isn't the £60,000. It's the 100% of earnings, or simply what's left at the end of the month.

When you can get at the money

This is the trade. The tax relief comes with a lock.

You normally can't take money from a personal pension before you're 55. That's the normal minimum pension age, and it's rising: it becomes 57 from 6 April 2028. Some people have a protected pension age, for example if their scheme gave them the right to take benefits earlier before 4 November 2021.

When you do take it, you can usually take up to 25% tax-free, up to a lump sum allowance of £268,275 across all your pensions. The rest is taxed as income when you take it.

A word on early-access offers

Anyone offering to unlock your pension before 55 should set off alarms. The Pensions Regulator lists offers to release cash from a pension before 55 as a classic scam warning sign, often with no mention of the tax bill that follows. It also says cold calling about pensions is illegal. If someone rings you about your pension out of the blue, that tells you everything you need to know about them.

SIPP or ISA?

Both shelter investments from tax, but they work in opposite directions. A pension gives you tax relief on the way in, taxes most of what comes out, and locks the money up until 55, or 57 from 2028. A stocks and shares ISA gives no relief going in, nothing to pay coming out, and you can take money out any time.

Which suits you depends on your tax rate now, your likely tax rate in retirement, and how much you value being able to reach the money. That's a personal call. GOV.UK points to free, impartial information from MoneyHelper, which doesn't give advice, and to a regulated financial adviser if you want a recommendation for your situation.