SIPPs Explained: How a Self-Invested Personal Pension Works

A self-invested personal pension (SIPP) is a personal pension that lets you choose and manage your own investments. It is popular with the self-employed, people who want to consolidate old pensions, and employees who want to save more than their workplace pension offers. It carries the same generous tax benefits as other pensions. This guide explains how a SIPP works, the tax relief on contributions, what you can invest in, when you can access the money and what to watch out for.

Tax relief on SIPP contributions

When you pay into a SIPP, the provider claims basic-rate tax relief from HMRC and adds it to your pension. In effect, every £80 you pay becomes £100. Higher-rate and additional-rate taxpayers can claim extra relief through their Self Assessment tax return, so for a higher-rate taxpayer, £100 in the pension can cost as little as £60. You can get tax relief on contributions up to 100% of your earnings, within the overall annual allowance of £60,000 across all your pensions, which includes employer contributions. Unused allowance from the previous three years can sometimes be carried forward. Non-earners can still pay in up to £2,880 a year, topped up to £3,600.

What you can invest in

SIPPs offer a wide choice: funds, investment trusts, exchange-traded funds, individual shares and bonds, and cash. That flexibility is useful but carries responsibility. Many people keep things simple with a low-cost global index fund or a ready-made portfolio. Compare platform fees, which may be a percentage of your pot or a flat charge, as well as dealing charges, since these compound over time. For larger pots, a flat fee can be much cheaper than a percentage.

When you can access your SIPP

You can normally take money from a SIPP from age 55, rising to 57 from April 2028. You can usually take up to 25% tax-free, subject to the lump sum allowance, with the rest taxed as income when withdrawn. You can leave the money invested and draw it gradually through drawdown, or use it to buy an annuity for a guaranteed income. Once you start taking taxable income flexibly, the amount you can pay into pensions with tax relief each year is sharply reduced, so plan withdrawals carefully.

SIPP or workplace pension?

If you are employed, your workplace pension usually comes first, because your employer contributes too and may match extra payments. A SIPP is a useful addition if you have used any matching, want more investment choice, or want to bring old pensions together. Before transferring, check whether an old scheme has valuable guarantees or would charge exit fees, and never transfer out of a defined benefit pension without regulated advice.

SIPPs for the self-employed

Self-employed people do not have an employer pension, so a SIPP is often their main retirement savings vehicle. Contributions reduce the tax you pay through Self Assessment, and you can pay in as and when your income allows; see our Self Assessment guide. Combined with the state pension, a SIPP can provide a comfortable retirement income.

SIPP or ISA?

A SIPP gives tax relief on the way in but locks your money until at least 55, while a stocks and shares ISA gives no relief but lets you withdraw tax-free at any time. Many people use both: the SIPP for retirement and the ISA for flexibility. See our guide to the ISA allowance.

Things to watch

Beware of anyone offering to unlock your pension before age 55 or promising unusual investments with high returns; pension scams are common. Also note that unused pension funds are due to become part of your estate for inheritance tax purposes from April 2027, which may affect estate planning. If in doubt, MoneyHelper's free Pension Wise service offers guidance.

Frequently asked questions

How much tax relief do I get on a SIPP?

Basic-rate relief is added automatically, so £80 becomes £100; higher-rate taxpayers claim more through Self Assessment.

SIPPs explained: self-invested personal pensions