What is a SIPP?

For many people, a SIPP is the best retirement savings vehicle they could choose because of its strong blend of generous tax breaks, low costs (if you shop around) and maximum control over your investments. Low costs and tax relief will turbo-charge your retirement wealth over many years, plus the freedom of choice offered by SIPPs enables you to optimise your investment strategy.
 
Before we cover those points in more detail, where do SIPPs fit into the UK’s fragmented pension landscape?
 

Types of pension

Personal pension – personal pensions may be privately set up by you or offered by your employer. The size of your pension pot and retirement income largely depends on the investments you build up with your pension contributions. SIPPs and stakeholder pensions are types of personal pension. 
 
Group Personal Pension – a personal pension offered by your employer. The pension scheme is typically managed by a major financial institution such as an insurance company. Your employer may offer a SIPP option, but workplace pensions more commonly offer a restricted choice of pension funds with the emphasis on costly active management. 
 
Multi-employer (or Master Trust) – These are NEST or The People’s Pension type auto-enrollment schemes that service many different types of employers through one scheme.  
 
Defined benefit pension – Your employer is responsible for your retirement income, and there are no investment decisions for you to make. These schemes are mostly closed to new entrants. 
 
Small Self Administered Scheme (SSAS) – Highly flexible schemes that are typically used by small privately owned businesses to provide for the company’s directors, senior staff and family members. A maximum of 11 people can belong to a SSAS, which can be run by its own members. 
 
You aren’t restricted to any one type of pension and you can accumulate multiple pensions over your lifetime.
 

Pension tax advantages

Even though most people must now save for their retirement out of their earnings, pensions still offer major advantages for long-term savers. First and foremost, you can get up to 45% tax relief on your contributions, or 46% if you live in Scotland. The government offers this incentive to encourage us to save for our retirement. 
 
For example, to make a £1,000 pension contribution, a higher-rate taxpayer would pay in just £800. The government adds the extra 20% via basic rate tax relief. Better yet, the higher rate taxpayer can claim back another £200 of their contribution through their Self Assessment tax return. This means a £1,000 contribution could cost only £600!
  Most taxpayers can contribute up to 100% of their gross earnings before tax into their pensions, up to an annual allowance of £40,000 without incurring a tax charge. Employer contributions don’t count towards your limit. Your annual allowance may be tapered if you have an adjusted income over £240,000 a year and a threshold income over £200,000 a year. Your annual allowance is also reduced when you take an income from your pension. You may also incur a tax charge if you breach the pension lifetime allowance of £1,073,100. 
 
All that complexity is worth it though to amp your investments with tax relief, employer contributions and national insurance savings too if your employer runs a salary sacrifice scheme. 
 
On top of that, your investments are protected from the capital gains tax, dividend income tax and income tax on interest for as long as they remain within your pension’s tax wrapper. You can also claim another 25% tax-free on withdrawals you make from your pension.
 
Moreover, many people drop down an income tax bracket in retirement. That’s another huge boost as, for example, the 40% tax relief they gain on contributions may only be taxed at 20% (and 0% up to their personal allowance) when they draw down their pension. 
 
All of these tax advantages plus favourable inheritance tax treatment makes SIPPs, and other types of the pension scheme, superb retirement vehicles. 
 
Note, that unlike the State Pension, you can access your SIPP and other personal pensions from your minimum pension age. Currently, that’s age 55 but it’s due to rise to age 57 by 2028 and will then be set at 10 years before your State Pension age.
 

SIPPs and ETFs

Control is one of the main attractions of a SIPP, especially if you want to maximise your investment opportunities. 
 
SIPPs offer you the freedom and flexibility to implement the investment strategy of your choice. 
 
This is a big contrast with most workplace pensions that typically offer a limited range of funds that aren’t particularly price-competitive. 
 
But with a SIPP you can invest in stock market listed shares, investment trusts and funds, unquoted companies, commercial property and more. This list includes ETFs, which are ideal for investors who want to create a diversified portfolio that covers different asset classes in a cost-effective and flexible way.
 
Because ETFs can be traded whenever you like, you can easily create a higher risk and potentially higher reward portfolio early in your working life. Then you can move to protect your gains by shifting towards safer investments such as bond ETFs later in your career – or whenever you think the stock market is getting frothy.
 
You can even hold high-yielding, dividend-paying ETFs in your SIPP to generate extra income in retirement.
 

The perfect pension for DIY investors

Full SIPPs can cost several hundred pounds to set up and run but are unnecessary for most people. The good news for ETF investors is that the best option is also the cheapest. You can build your ETF portfolio using a Lite SIPP as provided by the UK’s most popular, execution-only investment platforms. The best offerings charge a competitive annual fee for their SIPP, along with the usual platform charges and dealing costs. This means SIPPs are not just for the rich. 
 
By researching your options and being proactive about your financial future, you can manage your own ETF portfolio for a fraction of the cost of expensive pension solutions – and the money you save could mean there's more for you to spend in your old age.
 
We think ETFs and SIPPs are a compelling option for retirement planning – and the tools on justETF will help you every step of the way.