What is a SIPP and How Does it Work

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What is a SIPP and How Does it Work?

If you have a UK pension (or pensions) and have done any research into your options, you have probably come across SIPPs and wonder: What is a SIPP and how does it work?

What is a SIPP and How Does it Work?

Very simply, a SIPP is type of extremely flexible pension in the UK that provides the pension member with a very wide range of allowable investments and drawdown options.

“International SIPP” does not reference a specific product, but it is a term used to refer to the specific trustees and custodians who also focus on international clients and therefore offer additional flexibilities that many domestic UK SIPPs don’t – namely currency flexibility (which for us here means the ability to convert the SIPP into USD and invest in USD instruments).

Contrast this with a Personal Pension (PP) with usually offers a much smaller menu of investments to choose from and often has no withdrawal/drawdown options other than purchasing an annuity.

Neither one of these is inherently better than the other – it depends on your circumstances. If all you need is a simple, low cost pension to accumulate and grow your pension then a PP will usually suffice. If, however, you seek any additional features, then an International SIPP may be a better solution for you. Those additional features include but are not limited to a broader range of investments, portfolios or managers; currency flexibility; drawdown options; and professional advice.

SIPP Benefits

You may start drawing benefits from a SIPP at age 55. If you withdraw funds prior to this age you will be subject to a 55% Unauthorized Payment Charge (the reality is that you wouldn’t withdraw early because a trustee would not allow you to do this).

Typically, from a UK perspective, 25% of your account balance may be withdrawn tax free and the rest is taxable as income. Whether the tax free status of the 25% is preserved for US taxpayers is dependent on the application of the UK:US Double Taxation Agreement and there are differing opinions among tax professionals (and it can be different still at the state level). We don’t want to stray into tax advice, so if this applies to you we strongly urge you to consult a suitably experienced CPA (we can introduce you to a cross-border CPA if needs be).

You can find more detail on the taxation of SIPP benefits in our article – SIPP Taxation for US Residents

How Does a SIPP Impact Lifetime Allowance?

You will still be subject to the Lifetime Allowance (LTA) and SIPPs worth more than £1.055 million in 2019/20 will have the excess taxed at 25% at source (plus income tax in the US) when taken as income, or taxed at 55% at source when taken as a lump sum.

The LTA is, frankly, a bugger and applies to you whether you have a SIPP, a PP or a defined benefit pension (although the calculation may be different), so do not think that it only applies to you in a SIPP and not any other vehicle.

What happens to my SIPP Upon Death?

You can nominate whoever you like to receive your SIPP on your death. This could be your spouse, children or grandchildren, or you can nominate someone unrelated to you. Alternatively, you can also leave some, or all, of your SIPP to charity. You don’t need to leave your pension to just one person; you can split it in whatever proportion you like, so each of your beneficiaries receives a share of your SIPP.

Beneficiaries of your pension will normally have the choice of taking the pension fund as a lump sum or leaving the fund invested and using it to provide an income. If they choose to leave the pension fund invested, they can take income as and when required. Any funds left invested will continue to benefit from being in a tax-advantaged pension wrapper.

If you pass away before the age of 75 and your pension fund is ‘designated’ within 2 years, it will be received tax free (at least from a UK perspective). This is whether your beneficiary chooses to take it as a lump sum or if they leave it within the SIPP wrapper to provide them with an income in the future.

If you live past 75 (or if the funds are not designated within 2 years), then the death benefits will be taxed. Whether benefits are taken as a lump sum, or a left within the SIPP to be taken as an income in the future, they will be taxed as income as and when received by your beneficiary.

What does a SIPP Cost?

SIPPs themselves cost very little – usually a fixed fee of £200 to £500 p.a. In addition, a SIPP usually needs an investment platform, preferably a sophisticated one with currency options (at least for expatriates). Expect to pay 0.25% to 0.5% p.a. for a custodian and platform.

Your SIPP may have an adviser attached to it, who will provide certain services as agreed with you, including the management of your SIPP and they will charge a fee. This is usually around 1% p.a. but obviously depends on the firm and the services provided.

Finally, there are the investments within your SIPP. The investment expenses can range from zero, if you purchase individual securities, to 1.5% p.a. (or more) for multi-asset funds. For context, at PFW our portfolios average around 0.5% p.a.

So, ballpark, all in, you should expect a fully advised, fully invested international SIPP with currency flexibilities to come in at around 2% p.a.

And I reckon you can probably shave about 1% p.a. off this by doing it yourself (see next section).

The Do-It-Yourself SIPP

As the name would suggest (“self-invested”) it is actually very easy for you to set up and run your own SIPP (slightly harder for US resident, but what isn’t?!).

I am not making any recommendations here, but a couple of the big names in the DIY SIPP world are AJ Bell You Invest and Hargreaves Lansdowne(HL), although I have heard of US residents being unable to open HL SIPPs.

By doing it yourself, you will save the adviser fee, which will immediately cut 1% off the total fee, but generally DIY SIPPs do not offer currency options usually so valuable to expats who plan on retiring outside the UK.

So a DIY SIPP can be a good option for people with smaller pensions and/or those who don’t need currency flexibility and/or those who are happy to manage their own investments and don’t need or want further advice, but there could be restrictions.

Why can’t I transfer my UK pension into the US?

We are frequently asked about bringing UK pensions into the US and depositing into an IRA.  In our professional opinion, US rules do not allow for a tax free rollover to an IRA. That being said, having your UK pension funds in an appropriate International SIPP is pretty close to actually getting it over here and is usually a very acceptable, even preferable, solution to British expats (or anyone who have worked in the UK and built up a pension there).

For further information about UK Pensions in the United States read:,Should I Transfer My Pension?

Plan First Wealth is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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