SIPPs Explained

What is a SIPP?

A SIPP is a Self Invested Personal Pension, designed to accumulate savings in a tax efficient manner to provide benefits when you retire.

Tax Relief

One of the main benefits of a SIPP is the tax relief granted on contributions. For example:

1. Tax relief is automatically granted at the basic rate – currently 20%;

2. Therefore if you want to make a total payment £10,000 into a pension you need to first deduct the tax relief;

3. The tax relief in this example is £10,000 x 20% = £2,000;

4. Consequently you make a payment of £8,000 (£10,000 less £2,000 tax relief) into your SIPP which is available for investment;

5. The SIPP Operator then claims on your behalf the tax relief direct from HM Revenue & Customs;

6. Usually about ten weeks later HMRC pays the tax relief to the administrator who credits your pension with £2,000;

7. You then have a further £2,000 to invest;

8. Furthermore, if you are a high rate taxpayer, then you will be able to claim a further 20% tax relief via your annual tax return;

9. This means you could, depending on personal circumstances, pay £2,000 less tax than you would have done if the pension payment had not been made;

10. Overall therefore, the £10,000 pension payment has only cost you £8,000 for a basic rate tax payer and £6,000 for a high rate tax payer;

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