The tax efficiency of self-invested personal pensions is helping more UK savers to build a substantial nest egg for the future, with thousands of account holders building pots worth more than £1 million.
SIPPs offer investors far greater levels of control and flexibility over their pension pots, helping you to prepare for your retirement on your terms.
In 2024, the number of self-invested personal pensions that held more than £1 million grew again, with thousands of investors throughout the country boosting their wealth.
This data is made all the more impressive considering that for most people, SIPPs can contribute towards your annual pension allowance of whichever is lowest: £60,000 or 100% of a person’s income, before incurring tax charges.
There are many excellent hidden perks that help SIPPs to maximise their efficiency. While some tax advantages are more commonly known among pension savers, others may not be so obvious. With this in mind, let’s take a deeper look at some of the best tax perks of self-invested personal pensions that you may not know you can enjoy:
Relief for Higher-Rate Taxpayers
The biggest advantage of opening a SIPP is that your contributions are subject to tax relief. The government tops up contributions you personally make into your self-invested personal pension in a similar way to traditional pensions, providing a 20% boost on the deposits you make up to your annual pension allowance.
However, if you’re a higher or additional-rate taxpayer, it’s possible to claim back a further 20% and 25%, respectively, via the self-assessment process.
This means that you can receive a higher windfall if you’re already paying a higher rate of tax, boosting your earnings further upon retirement.
Tax-Efficient Withdrawals
When it comes to withdrawing your pension pot, you can also benefit from accessing 25% of your SIPP without paying any tax on your holdings.
This helps to provide you with a windfall when you reach retirement age at 55 (increasing to 57 from 2028).
Although the first 25% of your SIPP withdrawals don’t incur tax, the remainder is taxed as income based on your marginal tax rate.
Property Tax Advantages
SIPPs allow you to invest in a far greater variety of assets, including commercial property. This can offer strong tax advantages for both business owners and property investors alike.
For instance, if the SIPP provider supports it, any rent paid by tenants or businesses into a SIPP is entirely free of income tax. This means that the rental income can accumulate in the pension, boosting the portfolio’s growth. As a result, you could essentially be paying rent to yourself while gaining a corporation tax deduction on the rent as a business expense.
If the property you’re investing in is later sold for a profit, any gains you make in your SIPP are free from Capital Gains Tax (CGT). Additionally, when you buy a property through your private pension, it’s possible to use your contributions alongside tax relief, so part of the property purchase can be funded by what would otherwise be paid as tax.
Efficiency Through Compounding
Because the government tops up your SIPP contributions, it’s possible to make your pension pot stretch further through compounding your earnings and reinvesting them.
You’ll only be liable to pay out for your pension management fees from your provider, and keeping these as low as possible can maximise your compounded earnings.
With this in mind, it’s always worth auditing your SIPP providers once a year to check for lower rates elsewhere. When it comes to transferring your retirement savings, most providers can automate the process, taking the strain out of shifting your pensions.
Inheritance Tax Efficiency
Self-invested personal pensions can be passed on free of Inheritance Tax (IHT) if the holder dies before they turn 75 years of age. However, rules are subject to change from 2027.
This can make SIPPs a strong option if you’re already thinking about your estate and how your wealth can be passed down to your loved ones further down the line.
Although 75 years of age is a low threshold in the 21st century, it could be worth opening a SIPP safe in the knowledge that if anything happens, your children and grandchildren will be well looked after. The current IHT thresholds are £325,000 for most cases, or £500,000 if you plan to leave your main home to a dependent, so if your estate is lower than these respective figures, it shouldn’t apply to your family’s circumstances.
Unlocking the Benefits of SIPPs
Self-invested personal pensions offer plenty of tax efficiency for retirement planning, no matter how you decide to invest in your pension pot.
Even if you’re not a higher-rate taxpayer and aren’t expecting to reach your £60,000 or 100% of your income pension allowance threshold each tax year, you can still benefit from the effects of compounding your investments and more opportunities to avoid taking a tax hit when it comes to inheritance.
The best advantage of SIPPs is that you’re afforded full control over your investments, allowing you to save for retirement in any way you wish.
