What is a SIPP?

A SIPP is a DIY pension. Traditional personal pensions limit your investment choice to a shorter list of funds normally run by the pension company's own fund managers. With a SIPP you can invest almost anywhere you like and choose your own investments.

But with that flexibility comes responsibility. A SIPP is for someone who understands investing, does the research and is happy to spend some time working at it. If you make the wrong investment choices, you've only got yourself to blame, so you must feel comfortable managing your own investment portfolio and picking your own investments.

How do SIPPs work?

Think of a SIPP as being like a shopping basket. In that shopping basket you can place lots of different types of investments. The shopping basket (SIPP) holds those investments for you. And just like any other type of pension, it protects them from the taxman - you pay the money in before income tax is taken off. What this means in practice:

When a basic-rate taxpayer, paying 20% tax, invests £100, it only costs £80 (for a higher-rate taxpayer, paying 40%, it would only cost £60); the amount that would've been in their pay packet if they'd paid tax.

How to manage your SIPP

SIPPs can be managed completely online. Phone and postal services may be an option, but make sure you check with the provider to see if it costs more. You can buy and sell investments at the click of a button and keep an eye on how they’re doing, just as you'd check your accounts with online banking.

How to start your SIPP

You can either start it from scratch with money that hasn't been held in a pension, or you can move it from an existing pension scheme.

New contributions
If you don't have a personal pension already and decide you want to start investing in a SIPP, you can open one either by making monthly contributions, or if you have a big lump sum you can invest that.

Transfers from other pensions
If you already have a few pension pots, you can consolidate them all into a SIPP so they're in one place. Or, if you're not happy with your current pension plan, this could be an option.

If you do this, make sure you check there aren't any penalties for leaving your existing pension and that it'll actually be beneficial.

What investments can I put in a SIPP?

SIPPs provide a massive investment choice. If you're a first-time investor, don't get carried away.

The experts advise that if you're new to the investment game, it's a good idea to buy share-based funds rather than individual shares - this will reduce your risk exposure if an individual company fails. To reduce your risk even further, buy a range of different funds.

Investments which can be held in a SIPP include:

  • Unit trusts and Open Ended Investment Companies (OEICs)
  • Shares
  • Exchange traded funds (ETF)
  • Investment trusts
  • Gilts and corporate bonds
  • Cash
  • Commercial property

How much can I put in a SIPP?

While you can save as much as you like towards your retirement, there are limits to the amount you can save in a pension such as a SIPP and still get tax relief:

  • Earners. You can contribute 100% of your annual earnings before tax up to a limit of £50,000 for the 2013/14 tax year, falling to £40,000 for 2014/15.
  • Non-earners. You can contribute up to £3,600 per tax year and still get basic-rate tax relief. So, non-workers can pay in £2,880 per tax year, to which the taxman will add £720.

In addition to your annual allowance, there's also what's known as a 'growth time allowance' - this is the amount you can save tax-free into your pension in your lifetime. It's currently £1.25m.