How I Invest in the Stock Market – Part 3

SIPPs (Self Invested Personal Pensions)

These are also retirement savings account. Most employers will not contribute to a SIPP and especially if they have a company pension available to employees.

The SIPP is best placed for self-employed individuals or those on temporary contracts who have no recourse to a company-based pensions. That said, individuals with company pensions can still open a SIPP and contribute to it.

Contribution to a SIPP are seen as pre-tax hence the government (HMRC) gives you an extra 20% (into the account) and for higher rate tax payers, you complete a tax return to claim the additional tax relief.

E.g. if you are a normal rate tax payer you contribute £100 and the government (through HMRC) gives you 20%. Which implies it has cost you £80. For higher rate tax payers complete a self-assessment to get an additional 20% off.

SIPPs can usually be used as retirement income and withdrawn 3 years before the normal retirement age. Example is current retirememy age is 68, SIPPs can be accessed at age 65. Pension income is taxed but the first 25% of pension income taken as a lump sum is untaxed.

Note: according to current rules my total annual pension contributions (across all options) cannot be more than £40k but excludes LISA allowance of £4k if used for retirement.

I am currently in a dilemma – should I open a SIPP OR retain my LISA after my house purchase as my second form of retirement savings. I am yet to undertake a rudimentary calculation of the tax benefits at retirement. The info below is an example only and does not take account of personal tax liabilities etc

 ActivitiesLISASIPP
Contribution p.a. (Limits for these accts)£4k p.a = £333pcm Plus 25% gov’t bonus  
Total = £5k
£40k p.a. Includes all other pensions  
Total = £40k
Contribution – pre/post taxPost-taxPost-tax if permanent employee  
Pre-tax if self-employed
Assuming 25yr savings @7% interest compounded annuallyAssume you save £4kp.a  


Total Deposit – £100k
HMRC Rebate@25% – £25k
Total Contribution – £125k  

Total Interest – £203k

Total Amount – £328k
Assume you save £4kp.a


Total Deposit – £100k
HMRC Rebate@20% – £20k
Total Contribution – £120k  

Total Interest – £194k

Total Amount – £314k  
Tax at RetirementWithdraw cash freeWithdraw at income tax rate. ***
Potential Total Amount£328k tax free£314k@20% = £251k
Assumed numbers for comparison between a LISA and SIPP for retirement saving
Web based compound interest calculator used
** may affect your pension cash free lump sum

Do note however:

  1. For self-employed, contribution is made before your annual tax is paid, therefore, a lower tax burden. You can also contribute the full annual amount of £40k (google to find latest figures). For those who work with their spouses, you can also contribute to a personal pension for them, to the same amount which means a total of £80k in pension savings for the household but in different names. (again seek advice on this)
  2. For permanent employees, your contributions to a workplace pension and your employer’s contribution would count towards your annual pension savings limit of £40k. For those on final salary pension schemes, please refer to your scheme administrator for your annual limit. Any unused limit can be used in two ways:
    1. Through your company AVC – this is an additional voluntary contribution scheme through your workplace. Your employer will not contribute. All your contributions are paid pre-tax hence you have a higher take home than if you did this through a SIPP.
    2. Through a separate SIPP as outlined above.
    3. Or other ways as advised by your financial adviser.

4 thoughts on “How I Invest in the Stock Market – Part 3

    1. Thank you. Now that I have shared tax-efficient ways of saving/investment, next blog will be about how I chose my investments. I hope it helps someone research and start investing towards their future too

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