The 2023-24 tax year ends at midnight on 5 April, so you still have time to open and start paying into a self-invested personal pension (SIPP) – or increase your contributions if you haven’t yet reached your annual allowance.

To help you make the most of the opportunities, here’s a checklist of everything you need to know about SIPPs:

1. A SIPP puts you in control

A SIPP is a pension scheme that offers a flexible way to save for retirement and gives you more control over how your money is invested. Unlike a workplace pension, your employer can’t contribute to your SIPP.

2. A SIPP can complement your current workplace pension

Most employers offer a company pension. By law, your employer must pay in a minimum of 3% of your ‘qualifying earnings’¹, with an additional 5% coming from you (including tax relief). Some employers will match any additional contributions you make. But if they don’t, a SIPP can help with your additional pension saving needs. It could also give you access to more appropriate investments.

3. A SIPP can help you organise your other pensions

Most people are likely to work for several employers during their careers, accumulating different company pensions along the way. Bringing them under one roof can give you a clearer picture of your overall retirement savings and whether you’re on track to achieve your goals². It can also give you more control over your overall strategy and costs. Consolidating your pensions in a SIPP early on can save on paperwork later in life and ensure you don’t lose track of pensions as you grow older.

4. SIPPs are particularly useful for the self-employed

If you’re self-employed and have no company pension, there’s even more reason to have a personal pension like a SIPP. You can contribute money to it whenever you like, as and when your circumstances allow. This can be particularly useful if your earnings or expenses fluctuate.

If you’re a director of your own limited company, you can contribute to your SIPP directly from your pre-taxed company income. This can lower your company’s profits and, therefore, the corporation tax it must pay.

5. Contributing to a SIPP has tax benefits

Like most other pensions, SIPP contributions benefit from tax relief from the government. For every £80 you contribute, you’ll get a top-up of £20. If you’re a higher-rate or additional-rate taxpayer, you can claim back an additional £20 or £25, respectively, via your self-assessment tax return.

Your investments are also sheltered from capital gains tax (CGT) within a SIPP.

6. Tax relief is subject to an annual allowance

Under current regulations, the most you can pay into your pensions each year and earn tax relief on is £60,000 or 100% of your gross relevant earnings³, whichever is lower. This applies across all your pensions, including your SIPP. For those with higher incomes, the £60,000 may be reduced⁴. Those without earned income can still contribute £3,600 per year (including tax relief). 

7. You can draw money from age 55

You can start withdrawing money from your SIPP – and most other personal pensions – once you turn 55. This is due to rise to 57 from April 2028. Before you make a pension contribution, you should feel comfortable with the fact you’re locking away money for what could be several decades.

8. SIPP withdrawals have tax benefits too

When you come to withdraw your pension money, you can usually take up to 25% as a tax-free lump sum, capped at £268,275. If you don’t want to take this money in one go, you can make smaller ongoing withdrawals until you’ve used your tax-free cash. Any further withdrawals will be taxed as income.

9. A SIPP differs from an ISA

SIPPs and ISAs are both tax-efficient savings vehicles, but there are some important differences. As mentioned above, money in a SIPP is locked away until at least age 55, whereas you can draw money from ISAs whenever you like. And whereas SIPP contributions earn tax relief, ISA contributions do not. On the flipside, you won’t be taxed when you draw money from your ISA.

SIPP vs ISA: key differences

Source: Gov.uk, Vanguard

10. Vanguard offers a low-cost SIPP

Vanguard’s SIPP has an annual fee of just 0.15%, capped at £375 per year. We don’t charge for SIPP withdrawals or transfers, so once you add on the cost of the funds you invest in – depending on the funds you choose – your total costs with us can end up being well below 0.5%.

Other providers may charge two, three or more times this. The table below shows the difference that could make to your long-term wealth. It shows the potential impact of costs on £10,000 earning a 5% return over 20 years. After just three years, an investor paying 0.5% a year is almost £500 better off than one paying 2%. After 20 years, they’re more than £6,000 better off.  

The potential impact of costs on a £10,000 investment over 20 years

Source: Vanguard calculations. Note: Assumes £10,000 invested and earning an average annual return of 5%. Results are rounded to the nearest pound. Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

With Vanguard, you can build your own portfolio from a choice of more than 85 low-cost funds or choose from our ready-made portfolios, including our Target Retirement Funds, which reduce the level of investment risk as you approach retirement.

¹ Qualifying earnings are earnings between a lower and upper limit in a given tax year. For the 2023-24 and 2024-25 tax years, qualifying earnings are between £6,240 and £50,270.

² Not all company pensions may be suitable for transferring into a SIPP. So-called defined benefit (DB) – or ‘final salary’ schemes – which are becoming rarer, are usually not. If in doubt, consult a financial adviser.

³ For more on what counts as ‘relevant earnings’ that can earn tax relief when used to fund a pension, see the HMRC Pensions Tax Manual.

⁴ To work out if you have a reduced (tapered) annual allowance, see HMRC’s website.