Should you step into the control room of your own pension by converting it to a SIPP?

Posted on September 26, 2012 · Posted in Chris Mansfield - Blog

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We’ve been working with SIPPs for years with many of our overseas property SIPP investments.

If you are thinking about turning your current pension into a self invested pension then you should have a very good read of this comprehensive guide to SIPPS featured below.

In particular, we would remind anybody looking at investing in a SIPP that the process of becoming accredited as a SIPP for an investment is a very simple one and it is does not reflect any kind of real security.

What is a Sipp and why might I want one?

A self-invested personal pension is just a basket for storing investments in a tax-efficient way for you to live off later on during your retirement. Crucially, with a Sipp, you decide what goes into that basket, choosing from a wide – although not unlimited – range of assets. If you make good choices, then you could end up with a much better income to live on during your retirement than you might get with other types of pension.

Am I eligible to establish a Sipp?

Very likely. Until April 2006, it wasn’t possible to contribute to both a company scheme and a personal pension if you were earning more than £30,000 a year. That excluded a huge number of the people most likely to take out a Sipp. Now, however, you can participate in your employer’s scheme as well as having your own personal pension pot. There’s been a flood of people taking advantage of this new freedom.

Okay, but is a Sipp suitable for me?

While there are potentially many benefits to having a Sipp, it’s not necessarily a suitable arrangement for everyone. But if you are quite wealthy, have a good understanding of investment, and want to select individual shares and property to put in your pension, then a Sipp may be for you.

How rich do I have to be to make it worthwhile?

The freedom to pursue your own investment strategy can come at the price of higher costs.
If you want a full Sipp, you might have to pay a flat set-up fee of several hundred pounds and ongoing administration fees after that. Given this high level of fixed costs, you need to have quite a substantial sum to start off with to justify taking out a Sipp – probably over £100,000. But if you opt for a low-cost Sipp, you will not be able to use all the available investment options.

What sort of things can go into a Sipp?

Shares, bonds, and fund investments all qualify. Derivatives such as contracts-for-difference, futures and options are okay, too. Commercial property, notably your business premises and farmland, also meet the criteria.

What about residential property?

Unfortunately not. There were high hopes that the rules would change to allow people to put their main residences, Spanish villas, French ski chalets and buy-to-let properties in Sipps, but the chancellor changed his mind and there are only a few very limited ways in which you can get any exposure to residential real estate through a Sipp. Direct investment will now incur a 55 per cent penalty tax charge, apart from certain favoured categories: student halls of residence, nursing homes, prisons and hotels.
You can also invest in residential property through funds and syndicates. Syndicates must pass several tests, though, including having at least 11 members (no member can own more than 10 per cent) and having a value of at least £1m or holding at least three properties (no one property can account for more than 40 per cent).

Will my Sipp provider let me put all these things into my Sipp?

Not necessarily. Just because an asset qualifies for a Sipp doesn’t mean your provider will actually allow you to include it. Capita – administrator of the Scottish Equitable Sipp – was recently involved in a row because it refused to allow a customer to invest in an offshore fund-of-hedge funds, because of liquidity and bureaucracy issues. So, it’s vital to get the sort of Sipp that meets your particular requirements. And even if a Sipp does accommodate your needs, you need to ensure that the costs are reasonable.

Do I have to allocate my money in any particular way?

No. You could stick the lot into shares of your favourite company or into a particular commercial property, if you so chose. Clearly, though, that would not be advisable. Instead, you should use a Sipp to spread your investments across other assets within the Sipp or your assets outside it.

So I’d be running the show without outside interference?

Not quite. While you will decide which assets to hold, you will have to do it through a Sipp provider. The law says that a taxman-approved trustee and administrator must oversee each Sipp to ensure that all the rules are followed. So, your provider will assist with the paperwork, claim some or all of the initial tax relief back for you, and keep track of your portfolio on your behalf.

But, administration Aside, I’d be free to do as I choose?

That would depend on what sort of Sipp you went for. The most popular option is to have an advisory Sipp, where investors get help from professionals but make the decisions themselves based on the advice they get. In a discretionary Sipp, by contrast, a wealth manager takes the decisions for the Sipp holder. However, you can also pursue your own strategy and ideas exclusively, with your provider merely carrying out your orders.

What sort of tax breaks are on offer?

Very substantial. For every pound you put into your Sipp, the government will refund tax up to your marginal rate. If you’re a top-rate taxpayer – as most Sipp investors tend to be – that means the government will refund 40p in the pound on your contributions up to the annual contribution limit (£225,000 from 6 April) or 100 per cent of your earnings, whichever is lower. The Sipp itself receives basic rate (22 per cent) tax relief and you must reclaim the remainder through the self-assessment tax return. Also, your investments within the Sipp, and the income from them all, grow free of tax. More reading at investorschronicle.com