Tax implications

2018 Guide to Self-Invested Personal Pensions: Tax implications

Used properly, SIPPs are one of the most tax-efficient ways of saving for retirement

The details surrounding pension rules are very complex. If they affect you, careful planning combined with expert knowledge could be required to structure your affairs as tax-efficiently as possible.

Tax implications

Tax relief

SIPPs are one of the most tax-efficient ways of saving for retirement, and you can invest up to the annual allowance for tax relievable pension contributions, currently £40,000. As always, please bear in mind that tax relief will depend on your individual circumstances, and tax laws may change.

  • Receive up to 45% tax relief on your contributions
  • Take up to 25% of your pension fund as a tax-free lump sum from the age of 55
  • Pay no Capital Gains Tax or Income Tax on your investment growth

UK tax laws and individual personal circumstances can change. If you are resident in Scotland for tax purposes, the tax relief you will be entitled to will be at the Scottish Rate of Income Tax, which may differ from the rest of the UK.

The level of tax relief you can claim depends on your tax rate.

Non-taxpayers

Even if you don’t pay tax, you’re still entitled to tax relief at the same rate as a basic-rate taxpayer. The maximum you can claim relief on is £2,880 per tax year. If you contribute £2,880, you’ll receive £720 tax relief, making the overall contribution into your SIPP £3,600.

Making withdrawals

From age 55 onwards (57 from 2028), you have the option of making withdrawals. Typically, you may take 25% of the pension tax-free, and the rest is taxed as income. Instead of purchasing an annuity at age 75, you can keep the portfolio in which your SIPP is invested. With traditional pensions, you have to purchase an annuity at age 75. There’s a lot to weigh up when working out which option or combination will provide you and any dependants with a reliable and tax efficient income throughout your retirement.

Residual monies

Any residual monies left in your pension when you die can typically be passed to your heirs free of an Inheritance Tax charge. Any withdrawals your heirs then make will usually be tax-free if you died before you were aged 75. If you die when aged 75 or older, any withdrawals will be taxed as income at their marginal rate.

Sophisticated investors

Investing your retirement savings in a SIPP is not for everyone. While they offer greater flexibility than traditional pension schemes, they may have higher charges and be more suitable for more experienced, sophisticated investors. Contributions are also limited to the Annual Allowance (plus any Carry Forward), and you cannot access a pension until age 55, unless you are in a special profession. Income is taxable and additional tax is payable if you exceed the Lifetime Allowance.

The tax treatment of pensions depends on individual circumstances and is subject to change in future.

The details surrounding pension rules are very complex. If they affect you, careful planning combined with expert knowledge could be required to structure your affairs as tax-efficiently as possible.

Pension tax relief table Basic
  Basic-rate taxpayer (20%) Higher-rate taxpayer (40%) Additional-rate taxpayer (45%)
Your investment £800 £800 £800
Tax relief automatically received £200 £200 £200
Tax relief claimed through annual tax return N/A £200 £250

You will automatically receive 20% in basic-rate relief paid to your SIPP. If you are a higher/additional-rate taxpayer, you can then claim an additional 20% or 25% (depending on your tax rate) via your tax return.


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A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN.

YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.

Content of the articles featured is for general information and use only and is not intended to address an individual or company’s particular requirements or be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.