HomeWhat is a Self Invested Personal Pension (SIPP)?
A method of saving for retirement which attracts tax relief on the contributions made and has wider investment options than either a standard Personal Pension or Stakeholder Pension.
When can SIPPs be used?
They are used for building up money which is then generally used to provide an income in retirement.
SIPPs are generally contributed to by an individual, although employers and other third parties can make contributions. They are attractive to those who wish to invest in a wider range of assets than is possible via a standard Personal Pension or Stakeholder Pension, and have a more hands on approach to where their fund is invested.
SIPPs are also used when the fund is of a size that makes a SIPP more cost effective than a standard Personal Pension.
Main features
Contributions are made net of basic rate tax, which means that you will only contribute £80 for every £100 of contributions paid.
Higher and additional rate taxpayers also make contributions net of basic rate tax and can then claim additional relief via their Self-Assessment return.
Tax relief will be granted on personal contributions subject to the greater of:
- £3,600 per annum; and
- 100% of relevant UK earnings (salary, bonuses and benefits in kind, but not dividends)
Contributions to a SIPP, or to any pension plan, are subject to the Annual Allowance. The annual allowance is a simple limit on the total contributions paid to registered pension schemes in a scheme year, and includes all contributions made by you personally, through your business or by your employer or a third party. Any contributions in excess of the allowance will be taxed at your highest marginal rate, either 40% or 50% payable by you. HM Revenue & Customs (HMRC) has set the limit at £50,000 from 2011/2012 until 2015/2016.
It is currently unknown if any indexation will be applied to the Annual Allowance limit for the years 2015/2016 onwards.
SIPPs have wider investment powers than either Stakeholder or standard Personal Pensions and can potentially invest in any of the following assets:
- Funds as per a standard Personal Pension
- OEICs and Unit Trusts
- Investment Trusts
- Discretionary Fund Management
- Listed shares
- Unlisted shares
- Exchange Traded Funds
- Futures and options
- Commercial Property
- Deposit accounts
- Structured products
- Commodities such as gold
- Land
- Traded Endowment Funds
A SIPP may make loans to unconnected third parties, but not the members, provided they are on a prudent, secure and commercial basis.
A SIPP may also borrow, up to 50% of its value, typically for the acquisition of land or commercial property.
There are some restrictions designed solely to prevent abuse. Any SIPP holding prohibited assets directly or indirectly will have all tax advantages removed, which will broadly mean that it is at least no more advantageous to hold such assets in a pension scheme than it is to hold them personally. Prohibited assets include direct or indirect investment in residential property and certain other assets such as fine wines, classic cars, art and antiques.
From April 2010, the plan can be accessed from age 55.
The amount held within any pension contract, including a SIPP, is subject to the Lifetime Allowance. The standard Lifetime Allowance is the maximum amount of benefits that any one person can accumulate in registered pension schemes. For a SIPP it is simply the value of the fund when benefits are taken or at the time of death. HM Revenue & Customs (HMRC) has set the following limits:
- 2011/12 – £1.80 million
- 2012/13 onwards – £1.50 million
If total benefits exceed the lifetime allowance at retirement or death, a ‘lifetime allowance charge’ will apply to the excess of up to 55%. It is possible to have a personal lifetime allowance that exceeds the standard lifetime allowance if the value of benefits was greater than £1.5 million on the 6 April 2006, or is likely to exceed the lifetime allowance in the future. There are two forms of protection, although the option to register for one or both must have been registered by 5 April 2009. Another type of transitional protection is being introduced to help people who have pension rights that already exceed (or are likely to exceed) the reduced lifetime allowance of £1.50 million from 2012/13. Those who register for fixed protection will have a personal lifetime allowance of £1.80 million (until such time, if ever, that the standard lifetime allowance increases above this). The deadline for applying for this protection will be 5th April 2012.
From age 55 you can take a tax-free lump sum from your fund and use the rest to secure an income either via a Lifetime Annuity or Drawdown Pension. The amount of pension income you’ll get will depend on:
- How much you pay into the fund
- How much, if anything, your employer or a third party pays in
- How well your investments have performed
- What charges have been taken out of your fund by your pension provider
- How much you take as a tax-free lump sum
- Annuity rates at the time you retire and the type of annuity you choose should you take this option
- If Drawdown Pension is selected the Government Actuary’s Department (GAD) limits which in turn are based on gilt yields at the time of calculation
The value of the fund which has been built up to provide you with retirement benefits will be payable to your nominated beneficiary should you die before taking your benefits, this is not normally subject to Inheritance Tax.
The maximum that may be paid as a lump sum will equal the lifetime allowance currently £1.8 million (2010/11). Any excess lump sum will be subject to a 55% tax charge.
Advantages
- Contributions receive tax relief
- The fund will grow with no liability to tax on capital gains or income (except dividend income)
- Plans are often flexible with no penalties for stopping and starting contributions or retiring early
- A SIPP offers a wide range of investment options, some of which are not available via a standard Personal Pension Plan or a Stakeholder Pension
- Lump sum death benefits on death before age 75 are normally payable free of Inheritance Tax if benefits have not yet been taken
- From age 55 you have the option to take up to 25% of the fund as a tax free cash lump sum
Disadvantages
- Once money has been paid into a SIPP it cannot be accessed until age 55 at the earliest
- The charges on a SIPP can potentially be higher than those on a standard Personal Pension or Stakeholder Pension; however this is not always the case
Next Steps
Making the decision between the various options you have to save for retirement requires careful consideration and full knowledge of all the choices available to you.
Considering a SIPP leads to added complication, not only do you have to decide which SIPP provider is right for you but also how the funds will be invested.
At Investment Sense we believe in providing you with as much help as possible to make your decision and specialise in providing advice to clients who have existing SIPPs or are thinking of investing in one.
We offer initial meetings with no cost or obligation, we will investigate your options and present our report to you, allowing you to make an informed decision.
Should you wish to make an enquiry or receive advice please complete the enquiry form on this page or call us on 0845 074 7778.
