The 2022-23 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 should know about SIPPs:

1. A SIPP puts you in control

A SIPP is a pension scheme set up and run by the individual rather than by a company or workplace or any other external party. It offers a flexible and tax-efficient way to save for retirement, and it gives you control over where your money is invested.

2. A SIPP can complement your current workplace pension

Most employers offer a company pension1. By law, your employer must pay in a minimum 3%, with an additional 5% of your gross pay coming from you, including tax relief. But, in many cases, they may also match some of the additional, voluntary contributions you make. If they don’t or you have already made the most of this potential matching, a SIPP can help with your additional pension-saving needs – and maybe also lower your costs, give you access to more appropriate investments and improve your chances of investment success.

3. A SIPP can help you organise all 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 help give you a better grip of your overall retirement finances and whether you’re on track to get to where you want to be. It can also give you more control over your overall strategy and costs. And the earlier you do it, the better, potentially, as it can save on paperwork later in life by enabling you to move pensions as you change jobs2 and ensure you don’t lose track of pensions as you grow older. Harnessing the power of compounding from as early on as possible can also help your capital grow further.  

4. SIPPs are particularly useful for the self-employed

If you’re self-employed and, as a result, have no company pension, there’s even more reason to have a personal pension like a SIPP. As well as using it to consolidate previous company pensions – if, say, you left PAYE employment to work for yourself – you can contribute money to it whenever you like, either as regular payments or as lump sums, as and when your circumstances allow. If your earnings or expenses tend to fluctuate greatly, this is super-handy because the tax benefits (see below) can be carried forward from the previous three tax years as long as you belonged to a pension scheme such as a SIPP in that time3. In addition, if you are a director of your own limited company, you can use your company to pay into a SIPP as well as make individual contributions, subject to the usual allowance limits. The advantage of contributing to your pension through your company is that it can lower your company’s profits and, therefore, the corporation tax it must pay.

5. Contributing to your SIPP has tax benefits

Money paid into a SIPP can earn you tax relief. This means you get money back from the government – essentially, the income tax you originally paid on the money used to fund your pension contributions. Basic-rate (20%) taxpayers get this top-up automatically paid into their pension. So, to make a total £100 contribution, they just need to pay £80 into their SIPP as the government adds another £20 on top. And since higher-rate (40%) or additional-rate (45%) taxpayers can claim back a further £20 or £25 via their annual tax returns, it’s possible for them to pay as little as £60 or £55 to achieve £100 of pension savings.

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

6. The tax-relief on SIPPs is subject to an annual allowance

Under current regulations, the most you can usually pay into your pensions each year and earn tax relief is 100% of your gross annual earnings up to a maximum £40,000 for 2022/23 and £60,000 for 2023/244. This applies across all your pensions, including your SIPP.

If you were a member of a relevant scheme in the interim, you may also be able to carry forward any unused allowance from the previous three tax years.

7. SIPPs are subject to a lifetime allowance

A lifetime allowance also applies, which is currently frozen at £1,073,100 for 2022/23. From 2023/24 onwards, however, this will be phased out. If your total pension savings – excluding your state pension – exceed the lifetime allowance in the meantime, you could be taxed up to 55% on the excess if you withdraw it as a lump sum or 25% if you take it as income. If you think you are at risk of breaching the lifetime allowance, you could consider saving into an individual savings account (ISA) instead.

Even if you leave what’s in the pension untouched, your pension company will check the value of your fund against the lifetime allowance once you reach 75. Any portion of your SIPP above the limit will then be subject to tax at 25%.

8. SIPP withdrawals have tax benefits too

All pension savers are entitled to take 25% of their funds up to the value of £268,275 as a tax-free lump-sum payment when they retire – or at any point after they turn 55 (rising to 57 from 2028). If you do not want to take this money in one go, you can make smaller ongoing withdrawals until you’ve used your 25% allowance, after which any further withdrawals will be taxed as income5 – or you can take a mix of tax-free cash and taxable money at the same time.

9. How a SIPP differs from an ISA

The way your money is taxed on the way in and on the way out is what differentiates a pension/SIPP from an ISA – that and the ease of access. Because they earn tax-relief, your SIPP contributions are essentially tax-free. In the case of an ISA, they are not since you pay them out of your after-tax income. It’s why, you don’t get taxed at all on your ISA withdrawals – because that would mean taxing you twice.

SIPP vs ISA: key differences

	SIPP	ISA
Tax relief on contributions	Yes	No
Access any time	No	Yes
Free of capital gains tax	Yes	Yes
25% tax-free lump sum	Yes	No
Tax-free withdrawals	No	Yes
Annual contribution limit	£40,000 for 2022/23 and £60,000 for 2023/24	£20,0006

Source: HMRC, Vanguard.

10. Why a Vanguard SIPP

Vanguard’s investment platform has an annual fee of just 0.15% that is capped at £375 per year. This covers any ISA or general account you may hold with us as well as our award-winning SIPP7. We also 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%.

That compares with other providers who may charge two, three or more times this. To visualise the difference that could make to your long-term wealth, consider the table below. It shows the potential impact of costs on £10,000 invested earning a 5% average rate of 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, it’s more than £6,000.  

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

Total costs	1 year	3 years	5 years	10 years	20 years
0.5%	£10,450	£11,412	£12,462	£15,530	£24,117
1%	£10,400	£11,249	£12,166	£14,802	£21,911
1.5%	£10,350	£11,087	£11,877	£14,106	£19,898
2%	£10,300	£10,927	£11,593	£13,439	£18,061

Source: Vanguard calculations. Note: Assumes £10,000 invested and earning an average annual return of 5%. Results are rounded to the nearest pound.

With Vanguard, you can build your own portfolio from a choice of more than 80 funds or choose from our ready-made portfolios, including our Target Retirement Funds, which adjust the mix of shares and bonds you hold as you approach retirement.

Find out what makes Vanguard’s funds stand out from the crowd and about our pioneering work bringing down the cost of funds.

If you’d like to transfer to a Vanguard Personal Pension, we’ll open an account for you. We’ll then discuss any special benefits or guarantees that you may have built up with your existing provider. This is to ensure that you are aware you may be giving up these benefits by completing the transfer. Once all the paperwork has been finalised, the providers must complete the transfer within six months.

¹ Due to legislation, all workers aged between 22 and the state pension age, and earning at least £10,000, must be enrolled in one.

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 You can carry forward unused pension allowances from these years as long as your total contributions don’t exceed your earnings in the current tax year.

⁴ Exceptions include:

• People who earn more than £200,000 a year, whose annual allowance is gradually tapered to as low as £4,000 in the current tax year.

• Non-income taxpayers who get can tax relief on the first £2,880 paid into a pension.

• If you’ve accessed your pension and triggered the ‘money purchase annual allowance'.

⁵ Rising to 57 from 2028.

⁶ Correct as of 2022/23 and 2023/24.

⁷ Vanguard is a Which? Recommended Provider of SIPPs.