How Does a SIPP Work? Rules, Benefits, and Risks Explained

By Team SalaryCalculate · 7/8/2025

A Self-Invested Personal Pension (SIPP) is a powerful retirement savings tool for those seeking more control and flexibility over their pension investments. If you're new to SIPPs, you may want to start with our introduction to SIPPs here. This article builds on that foundation by explaining how SIPPs actually work — from contributions and tax treatment to investment rules, withdrawal options, and potential pitfalls.

SIPP Contribution Rules: How and How Much?

Contributions to a SIPP can come from:

• You (the investor)
• Your employer
• A third party (e.g. spouse or parent)

Annual Allowance (2024/25)

The standard annual contribution limit is £60,000 or 100% of your relevant UK earnings (whichever is lower). Contributions beyond this may trigger a tax charge, unless you're eligible for carry forward.

If you’ve already started drawing an income from your pension under flexible access, the Money Purchase Annual Allowance (MPAA) drops your contribution cap to £10,000.

Carry Forward Rule

You can carry forward unused allowance from the previous three tax years, provided you were a member of a UK-registered pension scheme in those years. This is useful for business owners, freelancers, or those with variable income.

More information:
Gov.uk: Pension tax rules on contributions

How Investments Work Inside a SIPP

SIPPs offer significant investment freedom compared to workplace or stakeholder pensions.

Investment Options

Depending on your provider, you may have access to:

• UK and overseas shares
• Bonds and gilts
• ETFs and index funds
• Investment trusts
• Commercial property (e.g. offices, warehouses)
• Cash, term deposits, and even some hedge funds

You can choose a self-directed model, or opt for managed portfolios, often based on your risk profile.

Dealing and Rebalancing

You can buy, sell, and switch between investments within your SIPP at any time (subject to dealing costs). Many providers allow automatic rebalancing, ensuring your portfolio stays aligned with your risk target over time.

Key takeaway: Investment decisions inside a SIPP can significantly impact your final retirement income, so strategy and discipline matter.

Withdrawing From Your SIPP: Access Rules and Tax Treatment

Minimum Access Age

You can access your SIPP from age 55, rising to 57 in 2028. This is known as your normal minimum pension age.

Access Options

You have multiple withdrawal choices under Pension Freedoms introduced in 2015:

1. Uncrystallised Funds Pension Lump Sum (UFPLS):
   • Take lump sums as and when you want.
   • 25% is tax-free, 75% is taxed as income.
2. Flexi-access Drawdown:
   • Take 25% tax-free upfront, then draw taxable income as needed.
   • Your investments remain invested and can continue to grow.
3. Annuity Purchase:
   • Convert your pension pot into a guaranteed income for life.
   • Less flexible but useful for those seeking security.
4. Full Withdrawal:
   • You can take the entire pot at once, but this often pushes you into a higher tax band.

Important: Withdrawals beyond the tax-free element count as income and may affect your tax bracket. You should also consider the impact on means-tested benefits.

Try the region Sipp withdrawal calculators to estimate taxes:

England SIPP Withdrawal Tax Calculator

Scotland SIPP Withdrawal Tax Calculator

Wales SIPP Withdrawal Tax Calculator

Northern Ireland SIPP Withdrawal Tax Calculator

More guidance:
MoneyHelper: Accessing your pension pot

SIPP Benefits (Beyond Just Investment Control)

While control and flexibility are the obvious advantages, SIPPs come with other strategic benefits:

1. Tax Efficiency

• 20% basic-rate tax relief is added automatically to your contributions.
• Higher-rate and additional-rate taxpayers can claim up to 45% total relief via self-assessment.
• Investments grow free of capital gains and income tax inside the wrapper.

2. Estate Planning and Inheritance

Your SIPP can be passed on to beneficiaries outside your estate, meaning it usually avoids inheritance tax.

• If you die before 75, the pension can be inherited tax-free.
• If you die after 75, your beneficiaries pay income tax on withdrawals at their marginal rate.

3. Consolidation Potential

You can transfer older pensions into one SIPP for easier management and cost savings. Just ensure the pensions

Risks and Considerations

1. You Bear the Investment Risk

SIPPs can rise or fall in value depending on the performance of your investments. You won’t get a guaranteed retirement income unless you purchase an annuity.

2. Fees Can Erode Returns

Some platforms charge flat fees, others take a percentage of your assets. Add trading charges, drawdown fees, and fund costs, and these can add up. They tend to favour larger pots (£50k+).

3. Regulatory Risk

While SIPPs are FCA-regulated, some investments marketed through SIPPs (e.g. overseas property, unregulated schemes) are not. Always verify a firm’s status using the FCA register.

4. Limited Contribution Scope Later in Life

Once you start drawing from your SIPP (beyond the 25% tax-free lump sum), your annual allowance may drop from £60,000 to £10,000 (MPAA), limiting further contributions.

Who Might a SIPP Be Right For?

• Investors confident in managing their own portfolio
• Those looking to consolidate multiple pensions
• Self-employed individuals seeking full control over retirement savings
• High earners maximising contributions and estate planning
• Anyone wanting access to a wider investment universe than most workplace pensions offer

Final Thoughts

A SIPP can be a powerful retirement tool if used correctly — combining tax efficiency, investment flexibility, and long-term growth potential. But with greater freedom comes greater responsibility.

If you’re unsure whether a SIPP suits your needs, consider speaking to a regulated financial adviser, especially when large sums or estate planning are involved.

For more information around SIPP, visit our SIPP resource hub.