Retirement7 min read·7 March 2026

What Is a SIPP and How Does It Work?

A SIPP gives you control over your pension investments. Here's what it is, how it differs from a workplace pension, and what the tax benefits actually mean.

Scenarios

This article is for general information and educational purposes only. It does not constitute financial advice. You should consult a qualified financial adviser before making any financial decisions.

The Basics

A SIPP — Self-Invested Personal Pension — is a type of pension that lets you choose how your money is invested. Instead of your contributions going into a default fund selected by a pension provider, you decide where the money goes: index funds, individual shares, bonds, investment trusts, or a combination.

The "self-invested" part is what distinguishes it. A workplace pension typically offers a limited menu of funds. A SIPP gives you access to thousands of investments across global markets. You're still bound by the same pension rules — you can't access the money until age 57 (rising from 55 in 2028), and withdrawals are subject to tax — but you have far more control over what happens to your money while it's growing.

How Tax Relief Works

The main reason pensions exist in their current form is the tax relief. When you contribute to a SIPP, the government adds money on top — effectively refunding the income tax you paid on that money.

If you're a basic-rate taxpayer (20%), every £80 you contribute becomes £100 in your SIPP. The provider claims the other £20 from HMRC automatically.

If you're a higher-rate taxpayer (40%), you contribute £80, the provider claims £20, and you reclaim a further £20 through your self-assessment tax return. So £60 of your money becomes £100 in the pension.

If you're an additional-rate taxpayer (45%), the effective cost is even lower — £55 of your money becomes £100.

This is often described as "free money," which isn't quite right — it's deferred tax. You'll pay income tax when you withdraw the money in retirement. But most people pay a lower tax rate in retirement than during their working years, so the net effect is a genuine tax saving.

The annual allowance for pension contributions is £60,000 (as of 2026/27), or 100% of your earnings if lower. Contributions above this are subject to a tax charge.

SIPP vs Workplace Pension

Most employees are auto-enrolled into a workplace pension. The minimum total contribution is 8% of qualifying earnings — but it doesn't all come from you.

Auto-Enrolment: Where the 8% Comes From

Minimum contributions on qualifying earnings

total

4% — Your contribution

Deducted from your gross pay

1% — Tax relief

Government top-up (20% basic rate relief on your contribution)

3% — Employer contribution

Your employer pays this on top of your salary

This is effectively part of your compensation, and opting out means leaving your employer's 3% on the table.

A SIPP doesn't replace a workplace pension. It sits alongside it. Common reasons people open a SIPP:

More investment choice. Workplace pensions often offer 10-20 funds. A SIPP might offer 10,000+. If you want to invest in a specific global tracker, a particular sector, or individual shares, a SIPP gives you that flexibility.

Consolidation. If you've had multiple jobs, you might have several small workplace pensions scattered across different providers. Transferring them into a single SIPP makes them easier to manage and often reduces fees.

Self-employment. If you're self-employed, you don't have a workplace pension. A SIPP is the most common way to save for retirement with the same tax advantages.

Control in drawdown. When you reach retirement and start withdrawing money, a SIPP gives you more flexibility over how and when you take income — compared to some workplace schemes that push you toward an annuity.

What Can You Invest In?

Most SIPP providers allow:

Funds and ETFs — index trackers, actively managed funds, multi-asset funds
Individual shares — UK and international stocks
Investment trusts — closed-ended funds listed on the stock exchange
Bonds — government gilts and corporate bonds
Cash — held as part of the portfolio, though returns are typically low

Some SIPPs also allow commercial property, though these are specialist products with higher fees and complexity.

What you can't hold in a SIPP: residential property, physical gold or commodities, fine art, vintage cars, or anything HMRC classifies as "taxable property." Attempting to hold these triggers a tax charge of up to 70%.

Taking Money Out

You can't access your SIPP until you reach the Normal Minimum Pension Age — currently 55, rising to 57 in April 2028. Once you reach that age, you have several options:

Tax-free lump sum. You can take up to 25% of your pension tax-free. This is known as Pension Commencement Lump Sum (PCLS). The rest is taxed as income when you withdraw it.

Drawdown. Leave your money invested and take income as you need it. You decide how much to withdraw and when. Each withdrawal (beyond the 25% tax-free portion) is added to your taxable income for that year.

Annuity. Use some or all of your pot to buy a guaranteed income for life from an insurance company. Once purchased, the income is fixed (or linked to inflation, at a lower starting rate).

UFPLS. Uncrystallised Funds Pension Lump Sum — take ad-hoc lump sums where 25% of each withdrawal is tax-free and the rest is taxed as income. This is an alternative to taking the full 25% tax-free lump sum upfront.

Most people use a combination. The right approach depends on your other income, your tax position, and how long you need the money to last — which is exactly the kind of question a retirement projection can help answer.

The Risks

A SIPP puts you in control, which means the outcomes — good and bad — are yours.

Investment risk. Your pension is invested in markets. Markets go down as well as up. Over long time horizons (20+ years), equities have historically produced positive real returns, but there are no guarantees, and short-term losses can be significant.

Decision fatigue. Having 10,000 investment options doesn't mean you need to use them. Many SIPP investors hold a single global tracker fund and contribute monthly. Simplicity is underrated.

Fees. SIPPs typically charge a platform fee plus the fees of whatever funds you hold. These compound over decades. A 1% difference in annual fees can cost tens of thousands over a 30-year period.

No employer match. Unlike a workplace pension, nobody is contributing alongside you. Every pound in a SIPP comes from you (plus tax relief). Always max out your employer match in a workplace pension before directing additional savings to a SIPP.

Who Is a SIPP For?

A SIPP isn't for everyone. If you're happy with your workplace pension's default fund and don't want to think about investment choices, that's a perfectly reasonable position. Default funds are designed to be broadly diversified and appropriate for most people.

A SIPP tends to make sense if:

You're self-employed and need a pension vehicle
You want to consolidate old workplace pensions
You want more control over your investments
You're approaching retirement and want flexible drawdown options
You're a higher or additional rate taxpayer maximising tax relief
You want to reduce fees — workplace pension charges are often 0.3-0.75%, and some SIPP providers now charge 0% platform commission, making them significantly cheaper for the same underlying investments

Fee reduction is one of the most common reasons people transfer a workplace pension into a SIPP. Even a small difference in annual charges compounds significantly over decades. If you're considering this, make sure you won't lose any employer contributions, matching, or valuable guarantees (such as a defined benefit pension) by transferring.

Model It

If you're weighing up how a SIPP fits into your retirement plan — alongside your workplace pension, ISAs, and other savings — you can build a free scenario and see how the pieces work together over time.