What are SIPPs?
SIPPs stands for "self-invested personal pensions". These are a 'do-it-yourself' form of pension that allows an individual to make his or her own investments into a personal pension pot.
But you don't have to be an investment genius to have a SIPP. They're great for:
- Pulling a whole load of personal pensions together (not a reason in itself to take one!).
- Having a wider variety of investments than in a normal personal pension including shares and commercial property.
- Giving you day to day control over the "big picture" such as moves from shares to cash or vice versa.
- Letting you into "income drawdown" - a way of having access to your tax free cash lump sum while keeping your pension invested. Income drawdown needs specialist help.
Although SIPPs are marketed as 'do-it-yourself' products, they are legally quite complex. They are pension plans and require full regulation.
So what are the rules?
You can move existing pension plans (take advice!), including old occupational pensions into your plan providing the annual contribution does not top £40,000*.
Money from existing pension funds can be transferable into SIPPs free of tax, although the relevant companies may charge administration fees for doing this. We would give you specifics around this once information is collected from the existing pension providers.
If, like most people, you earn less than £40,000, the maximum amount that you can pay in during any one year will be limited to your gross pensionable income. Like any other pension investment, this money will count benefit from tax relief against your tax bill.
Anyone taking out a SIPP must be a UK resident and under 75.
Investing in exotic products like jewellery, fine wines, antiques and classic cars is definitely out but it is possible to invest commercial property in a SIPP. Buy to let property is not allowed.
*Depending on contributions made and earnings in the 3 previous tax years, it is possible to make a contribution in excess of the £40,000 stated – speak to us if you want to find out how.
What you can put into a SIPP Pension
There is an entire array of investments which qualify for inclusion within a pension structure. However to gain access to the majority, savers will need either a Self Invested Personal Pension (SIPP) or a Small Self Administered Scheme (SSAS).
Pension rule changes, which came into effect in April 2006, mean it is possible to include any of the following list within a pension, provided of course the pension provider you choose, chooses to offer them.
The full list:
- particular stocks and shares quoted on a recognised UK or overseas stock exchange;
- government securities (gilts);
- unit trusts;
- investment trusts;
- insurance company funds;
- traded endowment policies;
- deposit accounts with banks and building societies;
- National Savings products;
- property;
- Direct property investment
Advantages and benefits of a SIPP pension
There are great advantages to taking out a SIPP - the most obvious being the scale of the tax perks.
Any investment in a SIPP is tax free, which for higher rate payers, means a discount of 40 per cent. And even for ordinary tax rate payers, savings of about 20% are not to be sniffed at. In theory, it gets even better because of the complex way that the tax system works mean that the actual saving can be even greater.
What are the disadvantages of SIPPs Pensions?
Despite their obvious attractions, SIPPs are certainly not suitable for everyone, not least because charges might be higher than on alternative, and usually perfectly adequate, solutions for most: products like a Stakeholder contract, or the now gradual introduction of workplace pensions. These offer minimal, and at least stated maximum charges, albeit with a significantly more limited Investment range than a SIPP could offer.
How do I get a SIPP Pension?
The answer is, as always, contact us and get advice.
Will I still have to buy an annuity?
For most people the answer will still be yes, but the system is flexible and those who can afford to live on a reduced income will be able to avoid buying an annuity.
The SIPP holder (you) will be able to take out up to 25 per cent of the fund as a tax free lump sum just as with any other pension. After the tax free lump sum, most people are likely to use the rest to purchase an annuity.
But what a SIPP can do well due to its flexibility is serve as a base for an income drawdown strategy. This involves you getting an income from your pension pot before you commit yourself to an annuity. It’s not a guaranteed winner and some drawdown investors have lost heavily.
Another way to avoid annuities is to leave the country. Each year, many tens of thousands go to live in Australia, Canada, South Africa and New Zealand. Using a little known deal called QROPs (it stands for Qualifying Retirement Overseas Pensions) they can 'smuggle out' (legally!) their pension pot and keep it in their new country without having to worry about an annuity.
Can a SIPP help me avoid inheritance tax?
The short answer is yes.
But then so will other forms of money purchase pension provided they are “written in trust” and you die before drawing on the pension.
Written in trust is a legal way of getting the money from the pension provider to your family by-passing your will – and inheritance tax – on the way. So if a person dies before withdrawing assets from their fund, members of their family could be able to inherit without payment of inheritance tax.
Again, this is a potentially significant saving, although exactly how much remains a grey area because it is unclear how the Revenue will treat such inheritances in the future.
It might come down to a judgement by the Revenue of the 'intent' of the SIPP fund holder - if the Revenue judges that investment in a SIPP was designed to avoid inheritance tax, then it could decide to impose a levy itself.
One of the big problems in trying to work around inheritance tax is what works today might not work when it comes to your demise and the need to pay the tax.
The best idea for anyone considering using a SIPP to avoid inheritance tax is to take professional advice at the time that will take account of that person's individual circumstances.
But as always, nothing is guaranteed!
