Self Invested Personal Pension (SIPP) Explained
Published / Last Updated on 24/05/2023
Personal Pension Plan (PPP)
A PPP can invest in stocks, shares, bonds, gilts, commercial property, cash in the UK and overseas. It is usual when people have a PPP that they invest in the pension provider’s (and sometimes external fund managers) own collective investment pensions funds e.g., UK Equity Fund, North America Fund, European Fund, Japan Fund, Fixed Interest Fund, Deposit Fund, Managed Fund, Balance Fund and Defensive Fund etc.
You get tax relief on contributions, lump sum payment at retirement with the balance of funds to buy an annuity or use flexible drawdown. There are annual allowances on the maximum amounts that you and your employer can pay into a pension as well as restrictions on the maximum lump sums you can withdraw. Early retirement ages are in line with current UK law etc.
For more on PPP, see: PPP
What is a Self Invested Personal Pension (SIPP)?
The clue is in the title, it is a Personal Pension Plan (PPP) with all the usual investment funds available and same tax relief, lump sum, annual contributions allowance rules but it has the ability for you to invest in much wider and more focused areas than a PPP does.
Wider Investment Choices for a SIPP
In simple terms, with a SIPP you have control and choice as to where your pension fund invests i.e., you are self investing rather than using a fund manager directly into specific stocks and shares traded on markets, private company shares, direct commercial property. Your SIPP can even have a mortgage to buy property although there are restrictions on the amount that your pension fund can borrow. Your SIPP can also have its own bank account and checking facility as well as deposit accounts. In addition, in the same way as a PPP, your SIPP can invest collective funds with a fund manager.
The following list is not complete but a useful summary of where a SIPP can invest and where there are restrictions.
Permitted Investments
- Stocks and shares of companies including investment trust companies and OEICS listed on HMRC recognised stock exchanges.
- Fixed interest securities, warrants, Permanent Interest-Bearing Shares, debenture stocks and loan stocks and convertible securities.
- Futures and options.
- Approved unit trusts and unapproved ones, if tax exempt.
- Insurance funds and unit linked funds of a UK Life Company.
- Traded Endowment Policies (TEPs).
- Deposit accounts with a recognised financial institution.
- Worldwide commercial property and land including farmland and forestry, freehold or leasehold.
- Residential Property or land only if an element of residential property is within a commercial purchase e.g. an on site flat for a caretaker, this may be allowed or if only a minor share as part of a multi-owner group e.g. 20 separate pension funds are buying equal shares as a commercial transaction.
Restricted Investments - allowed but special rules must be followed
- Lending money to your own Company.
- Buying shares in your own Company.
- Investments that benefit pension fund members at below commercial rates.
Prohibited Investments - Specifically excluded by HMRC
- Residential property – prohibited except as above e.g., caretaker’s flat.
- Works of Art.
- Fine wines.
- Stamps.
- Antiques.
Pension Borrowing Rules
- Allowed to borrow via mortgage no more than 50% of the pension fund value.
For more on SIPPs, see: SIPP
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