As the name suggests, a Self-Invested Personal Pension (SIPP) gives you more control over your investments. It remains a popular – and often low-cost – choice for contractors.
In this guide, we look at the benefits of SIPPs how they work in practice, and how to set one up.
What is a SIPP?
A SIPP is a type of pension that allows you to manage your investments inside a tax-efficient wrapper – like other defined contribution (DC) schemes.
However, unlike traditional pensions, SIPPs give the individual more control and access to a wider range of investments, including shares, bonds, mutual funds and ETFs.
If you like, you can set up a SIPP to run alongside a workplace or pension (if this applies), so you can make additional investments if you have spare funds.
What can you invest in via a SIPP?
You can invest in a wide range of things via your SIPP – from shares and funds to gilts.
We’ve included the percentage of each investment ii customers have included in their SIPPs.
- Funds (44.5%)
- Investment trusts (19%)
- Shares (21%)
- Exchange-traded products, e.g. ETFs (13.5%)
- Bonds and gilts (2%)
Management fees vary according to the type of investments you choose. SIPPs which include more complicated investments (like commercial property) will cost more.
What are the main benefits for contractors?
If you’re a limited company contractor, you usually won’t have access to a traditional workplace pension. A SIPP offers a great alternative (umbrella contractors can open one, too).
- SIPPs are tax efficient – Contributions receive tax relief, reducing your overall tax liability. You can get tax relief up to an annual limit of £60,000 (2024/5). You make contributions out of your personal income, or via your company.
- You have complete control – You have complete control over the products you invest in.
- SIPPs are flexible – You can vary the amount you invest in line with your contract earnings.
- Growth – With access to a broad range of investments, including products unavailable to ‘standard’ pensions, you have extra scope to grow your funds. There are risks involved too, of course.
- Retirement options – As with other pensions, you can withdraw a lump sum at age 55 (rising to 57 in 2028). SIPPs often have flexible options to draw down funds, including income drawdown, lump sums, annuities, or a combination to suit you.
How do SIPPS work in practice?
- Open a SIPP – Choose a SIPP provider and set up an account. Many providers cater specifically to contractors. Make sure you compare fees between providers, as they vary significantly. Some offer a fixed fee service, others charge a percentage fee based on how much you have invested.
- How do you contribute? – You can contribute personally or via your limited company. Both methods benefit from tax relief up to the £60,000 annual cap.
- Choose where to invest your funds – You can Invest in assets like stocks, bonds, ETFs, or commercial property.
- Track and adjust your investments over time – Track performance and adjust investments as needed.
- Withdrawing funds – You can withdraw up to 25% tax-free from age 55, with the remainder taxed as income.
What are the tax benefits of a SIPP?
Pensions represent one of the precious few tax breaks still available to contractors. You can contribute via your company (Corporation Tax deductible) or from your personal income (which also receives tax relief).
- Personal Contributions – You receive tax relief at the highest marginal rate (20%, 40%, or 45%).
- Employer Contributions – Company contributions are tax-deductible and an allowable business expense (in most cases), reducing the company’s Corporation Tax bill.
- Carry forward rules – You can ‘carry forward’ any unused allowance from the previous 3 years, subject to certain conditions. For example, you must have had a pension during those previous years.
- Tax-free fund grown – No Capital Gains Tax (CGT) or Income Tax applies to investments held within the SIPP.
- Inheritance Planning—Pension funds can currently be passed on tax-free if the individual dies before 75. Please note that the Chancellor proposes to make any unused pension or death benefits taxable under IHT rules from April 2027.
Read our guide to pension contributions and tax relief here.
How to choose the best contractor SIPP provider
Key factors to consider when selecting a provider include:
- Fees – Look at monthly or annual charges, trading fees, and any exit of ‘hidden’ charges. Some platforms charge a fixed monthly fee (and no trading fees), whereas others charge a fee per trade, but with lower monthly fees. Work out which is best based on your projected trading needs. Interactive Investor charges a fixed fee – from just £5.99 per month.
- Investment range – Can you access all the investment types you want via the platform?
- User experience – How usable is the provider’s investment platform, and how is customer support? For recommendations, check with other contractors and read reliable online reviews of contractor forums.
- Flexibility – Make sure your provider can accommodate both personal and company contributions.
How do you access your SIPP during retirement?
From age 55 (rising to 57 in 2028), contractors can access their pension funds in several ways:
- Tax-free lump sum – You can withdraw up to 25% of your accumulated pension fund tax-free.
- Drawdown – Withdraw funds flexibly while keeping the remainder invested.
- Annuity purchase – You can convert some of your pension savings into a guaranteed income for life.
- Combination approach – You can draw down a lump sum, regular income, purchase an annuity, or a combination. Check with your provider to see if they accommodate the options you wish to use.
Potential risks and other things to bear in mind
As with all types of investment, you should always be aware of the risks involved in setting up a SIPP. Seek financial advice if you have any questions about investing for your retirement.
The value of your pension can fluctuate, and government policy can also impact pension rules and tax relief allowances over time.
The ii Which? Recommended SIPP for contractors
Fixed-fee SIPP from £5.99 per month!
