Simple guide to SIPPs for the self employed

A Self-Invested Personal Pension (SIPP) is a popular way of saving for retirement for self-employed business owners.

Unlike employees who can benefit from workplace pensions (including employer contributions), you must make your own pension decisions if you’re a sole trader.

A SIPP is a flexible way to manage your pension – and it gives you more control over your investments than personal or workplace pensions.

What are the key benefits of SIPPs?

Tax relief on contributions: The government adds tax relief to your contributions up to 100% of your annual profits (subject to a cap of £60,000 per year for most individuals).
Flexible investment choices: SIPPs allow you to invest in a wider range of assets than stakeholder or personal schemes. These include shares, bonds, funds, and commercial property.
You have control over your investments: You decide where to invest your funds rather than relying on a provider’s default pension plan.
Pensions are tax-efficient: Like other pension schemes, investments within a SIPP are free from income tax and capital gains tax.
Inheritance benefits: SIPPs can be passed on to beneficiaries free of inheritance tax (IHT) if the individual dies before age 75. However, the government plans to make unused pensions subject to IHT from April 2027.

What tax relief is available on pensions?

Pensions remain one of the most tax-efficient ways to save, as you can claim tax relief on your contributions.

You can claim tax relief on contributions up to the standard annual allowance of £60,000 or 100% of earnings, whichever is lower.
Pension contributions receive basic rate tax relief (20%) automatically.
You can claim extra relief via your self-assessment tax return if you are a higher or additional-rate taxpayer.
If you have already accessed your pension flexibly, a lower Money Purchase Annual Allowance (MPAA) of £10,000 may apply.

What can you invest in via a SIPP?

Individual shares: UK and international stocks.
Mutual funds and ETFs: Diversified investments in various sectors.
Government and corporate bonds: Fixed-income securities.
Commercial property: Direct investment in property.
Cash deposits: Low-risk options to preserve capital.

How to set up a SIPP

Choose a SIPP provider: Compare different providers based on platform fees, the range of investments on offer, reputation, reviews and usability. The Interactive Investor (ii) SIPP is Which? Recommended and charges fixed fees starting at just £5.99 per month. Find out more here.
Open a SIPP account: Complete an application with your chosen provider. You will need to provide personal details and pass an ID verification check.
Add funds to your SIPP: Set up regular or ad-hoc funds to your pension.
Select investments: Choose investments based on your personal goals.
Monitor and adjust: Regularly review your pension and make any adjustments where needed.

How do you withdraw funds from your SIPP?

You can start withdrawing from your SIPP from age 55 (rising to 57 in 2028).
25% of your pension pot is tax-free, with the remainder subject to income tax.
You can withdraw funds in a number of ways:
- Lump Sum: Withdraw a one-off amount.
- Flexible Drawdown: Withdraw funds when you need them.
- Annuity Purchase: Convert your savings into a guaranteed income for life.
- Or a combination of any of the above.

Potential disadvantages of SIPPs

In this brief guide, we’ve highlighted some of the well-known advantages of SIPPs, but they’re not a suitable way to save for everyone. Here are some potential downsides.

Investment risk: You have more control over your pension if you opt for a SIPP, but conversely, this may result in a higher risk, as you need to decide upon your own investment strategy rather than outsource it to a fund manager.
Fees and charges: Some providers charge a low monthly fee, but you pay a fee each time you trade. Others charge a one-off inclusive fee regardless of how many trades you make. Make sure you work out the true cost of managing a SIPP.
Complexity: Managing a SIPP requires a certain amount of financial knowledge.

Choose the right pension provider

Here are some important things to consider when you choose a SIPP provider.

Platform fees: Providers usually charge a monthly fee (with or without trading fees) or a fixed percentage of your pension pot asset value. It’s very important to work out the real cost over time.
Investment range: Does the platform give you access to all the types of investment you’re interested in?
Ease of use: Is the platform intuitive and easy to use?
Reputation and Reviews: Sometimes, the best reviews are from people you know. You can also search online forums and review sites to learn more about the provider’s reputation.

ii – a Which? Recommended SIPP for the self employed

We have partnered with Interactive Investor, a Which? Recommended Self-Invested Pension Provider (SIPP) provider.

Interactive Investor charges low fixed fees – from £5.99 per month – not a percentage of your pension pot.

You can find out more here.

We recommend you talk to a pension specialist who can provide personalised advice tailored to your specific circumstances and needs. The information on our site should not be used as a substitute for professional advice.