Millions of savers are turning to self-invested personal pensions (SIPPs) to gain greater control over their retirement money, but the freedom they offer comes with a string of rules that can catch out even experienced investors. From contribution limits to withdrawal rules, there are important decisions to understand before moving money into or out of a SIPP.
AJ Bell has examined 15 of the most common questions people have asked about SIPPs over the past year, using data from Google Search Console, Semrush and Peec AI.
What is a SIPP and how much can you pay in?
A SIPP is a type of personal pension that allows you to choose from a much wider range of investments than many traditional pension arrangements. Depending on the provider, this can include funds, investment trusts, shares, exchange traded funds, bonds and gilts. The Government also provides tax relief on contributions, boosting the amount invested for retirement.
For most people, the annual pension allowance is £60,000, but there are rules around earnings and total contributions, with payments made by an employer or someone else counting towards the allowance. Those without earnings can still receive tax relief on contributions, with a £3,600 allowance.
Under carry-forward rules, unused allowances from the previous three years can potentially be used, but you cannot pay in more than your earnings for the year you are making the contribution. You must also have been a member of a pension scheme during the years from which you are carrying forward unused allowance.
Withdrawal rules and tax implications
SIPP savers can normally access their pension once they reach the minimum pension age, currently 55 but due to rise to 57 in 2028. In most cases, up to 25% of a pension pot can be taken tax-free, with the remainder staying invested to provide an income through drawdown. Savers can take their tax-free cash in stages.
Drawdown allows you to keep your pension invested while taking an income, offering flexibility in how much and when to take. However, taking too much can leave you with insufficient money later in retirement, and savers may need to consider their tax position.
Taking certain types of taxable pension income can trigger the Money Purchase Annual Allowance (MPAA), reducing the amount that can subsequently be paid into pensions with tax relief to £10,000 a year. This rule is designed to prevent people from recycling pension money for further tax relief.
Transfers, employer contributions, and costs
Workplace pensions can potentially be transferred into a SIPP, but savers are warned not to rush. Defined benefit pensions can come with valuable guarantees which could be lost on transfer, and some defined contribution pensions may offer guaranteed annuity rates worth preserving. Older pensions may also have exit charges.
People can have more than one pension, provided they stay within annual allowance rules. AJ Bell warns workers to check whether their employer will match additional pension contributions before putting extra money into a SIPP. An employer can pay into a SIPP if willing, but opting out of a workplace pension risks losing valuable employer contributions.
There is no simple winner between a SIPP and an ISA. SIPPs offer tax relief on contributions, while ISAs offer greater flexibility with tax-free withdrawals. Many people may benefit from using both, with a SIPP for long-term retirement saving and an ISA for accessible savings.
Savers need to look beyond investment performance, as there can be platform charges, fund charges and trading costs. These vary significantly depending on the provider and investments chosen, with some charging a percentage of the pension value and others using flat fees or caps.
Death benefits and opening a SIPP
Pensions are due to be brought into the inheritance tax regime from April 2027. Savers can nominate beneficiaries, although the provider retains discretion over whether to follow the nomination. Tax treatment depends on the age at death: if under 75, payments are tax-free; if over 75, they will usually pay income tax when withdrawn. Until April 2027, all pensions are free of inheritance tax, though most people will still not have a large enough estate to worry about it.
Opening a SIPP can generally be done online, requiring a National Insurance number, debit card details and information about any pensions to transfer. AJ Bell warns savers to understand charges, terms and conditions before proceeding, and those unsure should consider financial advice.
A Junior SIPP is a pension for a child under 18, offering similar investment choices as an adult SIPP. Up to £2,880 can be paid in each year, with tax relief potentially boosting this to £3,600. The money is locked away until the child reaches the relevant minimum pension age.
