SIPPs explained
What is a SIPP?
A SIPP is a Self Invested Personal Pension that provides you with the option of choosing when, where and how you invest the assets of your pension fund. Any contributions that you make to a SIPP will currently receive tax relief of between 20% and 40% depending on what prevailing tax rates are and what personal tax band you are in.
SIPPs have been around since 1989, but after the introduction of Pension Simplification legislation in 2006, SIPPs have become more accessible. Until recently, SIPPs have not fallen within the regulation of the Financial Services Authority (FSA) but this has now changed. Consequently more investors are feeling comfortable with taking control of their pension planning.
With a SIPP you are free to invest in:
- Unit Trusts
- U.S. & European Shares
- OEICs
- Bonds
- Investment Trusts
- Trustee Investment Bonds
- Insurance Company Funds
- Cash & Deposit Accounts
- UK Gilts
- Commercial Property
- UK Shares
- Hotel Room Style Investments
Who are SIPPs for?
In simple terms, a Self-Invested Personal Pension puts the investor in control of their pension planning. Traditionally SIPPs have been the domain of the wealthy but this is no longer the case. Whilst everyone’s circumstances are different, we advise all our clients to seek advice from an Independent Financial Adviser who will be able to inform you if a SIPP would be suitable for your needs and objectives.
In the recent past, prohibitively high charges have sometimes made SIPPs less accessible, but increased competition in the marketplace has seen a sharp drop in costs (both initial and ongoing). In its simplest form, a SIPP allows an investor much greater access to the investment markets.
Whilst SIPPs can potentially be extremely sophisticated and complicated and can provide excellent tax planning solutions, there is no reason why they cannot be used simply to provide an investor with more control over their pension planning by providing a wider range of investment options. In the current difficult financial markets it is essential to have the maximum amount of flexibility when planning for retirement.
Unlike “normal” personal pension schemes, you will be able to borrow against the assets of your SIPP fund in order to invest more aggressively or simply to leverage your buying power and returns on investment.
There are some fairly strict rules concerning borrowing money against your SIPP. For example you can only finance 50% of the value of any property that you purchase. Some of the disadvantages are less obvious but should still be considered and discussed with a suitably qualified Independent Financial Adviser before committing to a SIPP.
Investing in a commercial property
Buying a commercial property with a SIPP is one of the oldest advantages of having a SIPP. With some specialised providers you can also use your SIPP to purchase properties worldwide.
The most straightforward way that some larger pension funds use a SIPP is to buy their own business premises. This allows for several tax advantages, from the growth of the property being free of capital gains tax, to the fact that the rental income will be paid directly into the SIPP hence allowing for further pension growth.
Borrowing to finance a commercial property is also viable via a SIPP with most SIPP trustees allowing for borrowings of up to 50% of the pension fund. As an example, if a pension fund was valued at £200,000, the fund would be able to borrow a further £100,000 and invest into a £300,000 valued commercial property.
Additionally, there are further commercial property investments that can now be made via a SIPP, which include:
- Hotel room investments
- Prison property investments
- Overseas commercial property investments
The most important thing to remember is that the range of available investments depends largely on the choice of SIPP provider. Ultimately it is down to the trustees of your pension plan to agree whether they are happy to accept your investment choices into the SIPP. After all, the trustees are responsible and liable for ensuring that the investment choices fall within their remit.
Why use a SIPP
SIPPs have the same tax advantages as normal pension plans. In simple terms, they allow an investor to benefit from generous tax relief provided from the government on their contributions. This means that a taxpayer will receive a boost on their contribution depending on their tax rate.
A basic rate UK taxpayer investing £833.33 a year would get a further £166.67 tax relief paid into the SIPP of their choice giving a gross contribution of £1,000.
A higher rate taxpayer, using the same contribution would get an extra £333.33. In effect this means that a basic rate taxpayer gets an automatic 25% return on their contribution whereas a higher rate taxpayer gets an immediate return of 66.67%. Even in the most dramatically poor financial markets this represents a huge benefit for UK taxpayers.
SIPPs allow investment in a wide range of available options, and are an excellent tax efficient way to maximize growth.
Choosing a SlPP Provider – Things for consideration
- Charges
- Existing pension fund size
- Range of investments needed
- Administration charges
- Charges
There are a variety of potential charges including Establishment Charges, Annual Management Charges, Share-Dealing Charges, Unit Trust and Investment Trust Charges and one-off charges for specific transactions (e.g. commercial property purchase).
Pension Fund Size & Range of Investments
Historically SIPPs had high entry levels (£100,000) but this has changed drastically in the last two years. However, clearly the larger the fund size the greater the scope of flexibility in investment choices. As a general guide, pension funds of around £50,000-£100,000 should usually consider some of the lower cost online fund supermarket solutions available.
For larger funds (£100,000-£250,000) there is a range of insurers and stockbrokers that would provide a cost effective and flexible SIPP that would allow for a reasonably comprehensive range of investments. For funds of over £250,000 a more bespoke trustee based SIPP may be required which would allow access to the whole range of SIPP investments.
Administration Charges
This is always a crucial area for any SIPP regardless of whether complex investments are involved. Being able to get access to information and making transactions are essential when considering the importance of retirement planning. A lot of SIPP providers provide on line access, which for some investors may be crucial.
Will your pension give you the retirement you want?
SIPP Considerations when Transferring in:
- Charges
Existing charges on current pension plan? How do they compare to a SIPP? A direct comparison via an illustration should be used to give an idea of comparable costs. Whilst many people perceive that SIPPs are a more expensive choice this may not necessarily be the case especially when compared with older pension plans.
Time to Retirement
How close an investor is to retirement will affect how they want to either take their benefit (if they are near retirement) or how long term their investment strategy is if they are a long way from retirement,
Investment Objectives
An investor needs to address whether their existing pension planning is still relevant and still provides the structure that their portfolio requires,
Investment Strategy
Does the investor have a different risk profile that may be better served by a SIPP?
Guarantees and Options
Are there any existing guarantees built in with an investor’s current pension plans?
With Profit Funds
Are there any penalties for transfer? Obviously this applies across the range of potential transfers but With Profits funds are particularly susceptible to adjustments on transferring out (often referred to as Market Value Reduction / MVR).
QROPS (Qualifying Recognised Overseas Pension Schemes) transfers are an alternative if you are an expat living abroad or currently in the process of planning to relocate overseas.
Protected Rights Changes
SIPPs will now be allowed to hold Protected Rights. The effective date was 1st October 2008. Protected Rights will be permitted to be invested in the full range of investments allowable under a SIPP.
The Protected Rights pot must be tracked separately and used to pay a 50% spouse’s pension when used to purchase an annuity (if applicable). All other retirement options will be available.
Small Self-Administered Pensions (SSAs) will not be able to hold protected rights
If you are an expat living abroad you may be interested in transferring your existing protected rights pension into a QROPS provider, which can offer some very attractive benefits.
How much can I pay into a SIPP?
There is sometimes confusion over the maximum amount that can be paid into any form of pension planning. There is in fact no financial limit on the amount that can be contributed to a registered pension scheme.
However, there is a maximum amount on which an individual can claim tax relief in any tax year. This is set out as the greater of:
- £3,600
- 100% of an individuals UK relevant earnings up to a maximum of £255,000 (2010-11)
In addition to these restrictions there is also the Lifetime Allowance of cumulative funds within an individuals pensions, which is currently £1,800,000 (2010-11), though this may be subject to change,
Alternatively an employer can make an annual contribution of up to £255,000 on behalf of an employee regardless of the employee’s remuneration.
For expat pensioners living abroad or for those who are thinking about making the move, then a Qualifying Recognised Overseas Pension Scheme or QROPS can offer even greater flexibility.
What you need to do next….
If you would like to be put in touch with an Independent Financial Adviser, please feel free to call us for an introduction to one of our selected panel.
If you’re interested in learning more about how to protect and grow your total wealth, do either email us, info@davenport-wealth.com or call us direct on 0845 180 0104 we’d be happy to discuss your particular needs.
Please contact me re SIPP.