What Is a SIPP and How Does It Work?

What Is a SIPP and How Does It Work?

A SIPP (Self-Invested Personal Pension) is a pension you set up yourself that gives you control over how your money is invested. I have one. It's the pension I use for all my self-employed retirement saving, and it's where I hold Vanguard global equity trackers through Interactive Investor's platform.

A SIPP works like any other defined contribution pension when it comes to tax relief and contribution limits. The difference is choice. Where a workplace pension gives you a curated list of funds, a SIPP gives you the full menu: individual shares, exchange-traded funds, investment trusts, bonds, and thousands of funds from different providers.

Whether that extra choice is useful depends on what you want to do with it. For most people, including me, it means picking one low-cost global tracker and leaving it alone.

How does a SIPP work?

A SIPP sits inside the same tax rules as every other registered pension scheme in the UK. Contributions get tax relief. Growth is free from income tax and capital gains tax. You can access it from age 55 (rising to 57 in April 2028), taking up to 25% tax-free and the rest through drawdown, an annuity, or lump sum withdrawals.

The "self-invested" part means you choose the investments. In practice, most people who open a SIPP invest in a handful of low-cost index tracker funds and don't touch them for years. You don't need to be an active trader. I check mine a few times a year, mostly to make sure my contributions have gone through.

All SIPP providers are regulated by the Financial Conduct Authority (FCA), and your funds are protected up to £85,000 by the Financial Services Compensation Scheme (FSCS) if your provider were to fail.

SIPP tax relief

SIPP contributions work on a "relief at source" basis. You pay in 80% of what you want to contribute, and your SIPP provider claims the other 20% from HMRC.

Put in £800, your provider claims £200, and £1,000 lands in your pension.

If you pay higher rate tax (40%), you can claim back a further £200 through Self Assessment, making your effective cost £600 for £1,000 in the pension. Additional rate taxpayers (45%) can claim back £250, reducing the cost to £550.

As someone who pays corporation tax through a limited company and then draws a salary and dividends, the interaction between SIPP contributions and tax planning is one of the most valuable things about having one. For years I didn't make contributions and missed out on significant tax savings. Don't make that mistake.

For a detailed breakdown of how relief works at different income levels, see our guide to pension tax relief.

Key term: Tax relief is the government's way of incentivising pension saving. It means some of the money you would have paid in Income Tax goes into your pension instead.

How much can you pay into a SIPP?

The annual allowance for pension contributions is £60,000 for the 2025/26 tax year. This is the total across all your pensions combined, not per scheme. You can contribute up to 100% of your annual earnings, or £60,000, whichever is lower.

If you have no earnings at all, you can still contribute £2,880 per year to a SIPP. Your provider adds 20% tax relief, bringing the total to £3,600. This applies to non-working partners, carers, and anyone without employment income.

You may also be able to use "carry forward" to contribute more than £60,000 in a single year, using unused allowance from the previous three tax years. This is worth knowing if you have a good year and want to make a larger one-off contribution. The rules are covered in our annual allowance guide.

What can you invest in?

This is where a SIPP pulls away from a standard personal or workplace pension. A typical SIPP lets you invest in funds (index trackers, actively managed, multi-asset), individual UK and international shares, exchange-traded funds (ETFs), investment trusts, government and corporate bonds, and in some cases commercial property.

The exact range depends on your provider. Most major platforms offer thousands of funds and shares.

For most people, a low-cost global equity index tracker fund is a sensible default. It gives you broad exposure to thousands of companies worldwide, fees are very low (often 0.1% to 0.25% per year), and you don't need to monitor it constantly. Vanguard's global equity trackers are among the most widely held for this reason, and they're what I use.

You don't need to use the full range of options just because they're available. Wider choice is an advantage, not an obligation.

Personal pension vs SIPP: what's the difference?

Technically, a SIPP is a type of personal pension. The distinction is about investment choice. A standard personal pension offers a limited selection of provider-chosen funds. A SIPP gives you access to a much broader range and lets you build your own portfolio.

The line has blurred. Many providers now offer "full" SIPPs with thousands of options alongside "simple" personal pensions with curated fund lists, all on the same platform. The tax treatment is identical.

If you just want a pension with a sensible default fund and no decisions to make, a standard personal pension or stakeholder pension does the job. If you want to choose your own investments, even if that choice is a single global tracker, a SIPP gives you that flexibility.

Fees: the thing that actually matters long term

SIPP fees vary significantly, and over decades even small differences compound into large sums. There are two types of cost.

Platform fees are what the provider charges for holding the account. These are either a percentage of your pot (Vanguard charges 0.15%, AJ Bell charges 0.25% on the first £250,000) or a flat monthly fee (Interactive Investor charges £12.99 per month). Percentage fees work out cheaper when your pot is small. Flat fees become better value as your pot grows.

Fund fees (the Ongoing Charges Figure, or OCF) are charged by the fund itself, on top of the platform fee. A global equity index tracker typically charges 0.06% to 0.25%. Actively managed funds charge 0.5% to 1% or more.

At £50,000, a 0.45% platform fee costs £225 a year. A £12.99 flat monthly fee costs £156. At £200,000, the percentage fee costs £900 while the flat fee is still £156. The crossover point matters, and it's why I moved platforms.

Mark has written about fees extensively. A difference of just 0.25% in annual fees over a 40-year working life can cost tens of thousands of pounds. Check what you're paying.

Why I moved from Vanguard to Interactive Investor

When I first went self-employed and set up a limited company, a pension was the last thing on my mind. I was focused on contracts and IR35. Mark set up a SIPP for me with Vanguard, invested in their global equity trackers. Excellent choice. I then forgot about it and paid nothing in for years.

That was expensive. Every year I didn't contribute was a year of tax relief I didn't claim and compound growth I didn't get. After three or four years I started making regular payments.

The Vanguard product is excellent. Low fees, well-constructed funds. But I found their platform clunky and difficult to access. I couldn't easily log in and see my pension clearly. As the pot grew, that mattered more.

I moved to Interactive Investor for the flat fee model (better value as the pot grows), the user experience (I can actually see everything clearly), and the dashboard that shows how much of my annual allowance I've used and what's left in the tax year. That last feature alone has changed how I plan contributions.

The key point: I still hold Vanguard's global equity trackers. I just access them through Interactive Investor's platform. You don't have to go to Vanguard directly to buy their funds. Most major platforms offer them.

Disclosure: If you're considering Interactive Investor, this is my referral link. Sign up through it and you get a year with no platform fees. I receive a small commission. This doesn't influence what I write. I moved for the reasons above and would say the same without the link.

How to open a SIPP

Opening a SIPP takes 15 to 20 minutes online. You need your National Insurance number, ID, bank details, and a decision on how much to contribute (monthly direct debit, lump sum, or both). Most providers let you start from £25 per month.

You can transfer existing pensions into a SIPP. If you have old workplace pensions sitting forgotten with previous employers, consolidating them into one place can reduce fees and make them easier to manage. Before transferring, check for loss of guarantees or exit fees. Our guide on pension consolidation covers this, and the pension dashboard can help you track down pensions you've lost.

SIPP vs workplace pension

If your employer offers a workplace pension with matching contributions, that comes first. Employer contributions are free money. A SIPP doesn't come with them.

The typical approach: maximise your workplace pension to at least the employer match, then use a SIPP for additional saving. The annual allowance of £60,000 applies across both.

For self-employed people without a workplace pension, a SIPP is usually the most practical option. The tax relief is identical, and the investment flexibility helps keep costs low.

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Key takeaway: A SIPP gives you control over your pension investments within the same tax rules as any other pension. For most people, including me, the best use is holding a low-cost global tracker in a platform with fees that suit your pot size, then leaving it to grow.

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Frequently asked questions

What is a SIPP pension?

A SIPP is a Self-Invested Personal Pension. It is a type of defined contribution pension that you set up yourself, giving you control over what your money is invested in. SIPPs offer a wider range of investment options than standard personal or workplace pensions.

How much can I pay into a SIPP?

You can contribute up to 100% of your annual earnings or £60,000, whichever is lower. If you have no earnings, you can still contribute up to £2,880 per year and receive tax relief, bringing the gross contribution to £3,600.

Do I get tax relief on SIPP contributions?

Yes. SIPP contributions receive tax relief through the relief at source system. You pay in 80% and your provider claims 20% from HMRC. Higher and additional rate taxpayers can claim further relief through Self Assessment.

Can I have a SIPP and a workplace pension?

Yes. There is no restriction on holding both. Most people should maximise their workplace pension first to capture employer contributions, then use a SIPP for additional saving. The annual allowance of £60,000 applies across all your pensions combined.

When can I access my SIPP?

The minimum pension access age is currently 55, rising to 57 in April 2028. You can take 25% tax-free and access the rest through drawdown, an annuity, or lump sum withdrawals. There is no requirement to access it at any particular age.