The tax benefits of a SIPP

For most of us, retirement starts as a far-off, abstract idea. Then, all too soon, it’s just around the corner. The choices you make now can have a real impact on how comfortable your retirement turns out to be.

A Self-Invested Personal Pension, often shortened to a SIPP, is one of the most tax-efficient ways to save for retirement in the UK. It’s designed for individuals who want greater control over how their pension is invested, while still benefitting from flexibility and generous tax advantages.

SIPPs are especially popular among people who are self-employed, those without access to a workplace scheme or anyone who has built up several pensions and wants to bring them together in one place. But anyone can open one, and many people use one alongside a workplace pension.

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What is a SIPP?

A SIPP is a type of personal pension that allows you to choose how your retirement savings are invested. Unlike some pensions, where investment decisions are made for you, a SIPP gives you control over where your money goes.

You can invest in a wide range of assets, such as:

• Company shares
• Investment funds
• Bonds
• Commercial property (in some cases)

A SIPP lets you contribute and receive tax relief up to the annual allowance of £60,000 or 100% of relevant earnings (whichever is lower). If you have no earnings, the maximum contribution you can make is £3,600 per tax year, including tax relief.

It’s also possible to save for a child’s future retirement using a Junior SIPP, with contributions of up to £3,600 each tax year, including tax relief.

Money in a SIPP is designed for later life. You can usually access a SIPP from age 55, although this is due to rise to 57 from 2028.

Learn more about our Self-Invested Personal Pension (SIPP)

Key benefits of a SIPP

One of the biggest attractions of a SIPP is the tax treatment. These benefits are designed to encourage long-term saving and can significantly boost your retirement pot over time.

1. Tax relief on contributions

One of the biggest advantages of a SIPP is tax relief. Tax relief is a government incentive that effectively tops up your pension savings. If you pay income tax at the basic rate, the government adds 20% to your contributions. So, if you pay £80 into your SIPP, tax relief takes the total to £100.

If you pay income tax at a higher rate or additional rate, you may be able to claim further tax relief through your tax return or by contacting HMRC.

Read more about tax relief

2. Grow investments tax-free

Any investments held within a SIPP grow free from income, dividend and Capital Gains Tax. This means there’s no tax on interest when investments are sold, or when you receive income from dividends.

3. Take 25% tax-free

When you start to take money from your pension, you’ll usually be able to take up to 25% of your pension pot tax-free, subject to the lump sum allowance. The remaining 75% is generally subject to income tax when you withdraw it. Many people leave the taxable portion invested and draw on it gradually, which can help manage their tax position in retirement.

Learn more about taking tax-free cash from a pension

4. Employer contributions are highly tax-efficient

Employer contributions can also be very tax efficient. Contributions paid by an employer into a SIPP are not subject to income tax or National Insurance.

However, from April 2029 the Government will limit the National Insurance advantage of salary sacrifice pension contributions to £2,000 per year. Any contributions above this amount will be subject to both employee and employer National Insurance.

5. Carry forward your allowances

Pension carry forward rules allow you to make use of unused annual allowances from the previous three tax years, provided you had a pension in place during those years and have sufficient earnings. This can make it possible to contribute more than the standard annual allowance in a single tax year while still benefiting from tax relief.

This can be particularly helpful for people with irregular income, bonuses, or a one-off increase in available cash, as it allows them to boost their retirement savings tax-efficiently.

Read more about carry forward allowance

6. Choose and control your investments

With a SIPP you have full control over where your money is invested. You can adjust your investments over time and pick from a wide range of investments to suit your attitude to risk, goals and time horizon.

How SIPPs fit into financial planning

SIPPs combine tax relief on contributions with tax-free investment growth, which makes them a powerful tool for retirement saving. Because the money is locked away until later life, they’re best suited to long-term planning. For those who can commit to regular contributions, these tax efficiencies can play an important role in building retirement income over time.

Whether you’re in your 20s, your 50s or in-between, a SIPP gives you the opportunity to take control of your retirement savings. Starting earlier can give your money more time to grow, but it’s never too late to benefit from the tax efficiencies a SIPP offers.

Where to get help

The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at ww.moneyhelper.org.uk or over the telephone on 0800 138 3944.

Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products, though this will have a charge.

Read: Your tax year end checklist

Read: Want to be tax-efficient but don't know where to start?

Read: How long could it take me to save £20k, £50k or £100k?

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.