Back to basics: What is a SIPP?
A self invested personal pension (SIPP) is just the same as any other personal pension, registered with HM Revenue and Customs, but with additional investment flexibility and control.
As with other registered pension schemes a SIPP is largely tax-exempt and therefore investment returns (except the dividends from UK equities) and realised capital gains will not be subject to tax within the scheme.
A SIPP enables you to have control over the investment selection process for your retirement savings. There is no list of allowable investments but HM Revenue and Customs will tax certain assets, such as residential property, which makes them unsuitable as an investment.
Generally SIPPs invest in funds, stocks, shares, and commercial property. However, some providers will allow more esoteric investments such as unlisted company shares, gold and intellectual property. SIPP providers will generally have a list of assets they are comfortable in dealing with and this should be available on their website or by asking.
You may choose to make your investment decisions yourself or appoint an investment manager or adviser of your choice. Your SIPP provider should not dictate this.
In addition to making investments, a SIPP can also borrow up to 50 per cent of its value in order to invest further. This is usually to buy a commercial property but can be used for other assets provided the lender, such as a high street bank, allows this. A SIPP can also lend to what is known as an ‘unconnected third party’, but this is fairly unusual and not all SIPP providers will allow this.
Building the SIPP
When you pay contributions you can get up to 45 per cent tax relief on those contributions depending on your earnings and personal circumstances. Your employer can also pay into your SIPP and they are likely to receive corporation tax relief on these. The total level of contributions to all your pension schemes each year is checked against the annual allowance, which is currently £40,000. Anything over the annual allowance is subject to a tax charge which varies depending on the level of tax you pay. It is designed to remove any tax relief given over the £40,000 annual allowance. In some cases it is possible to use your annual allowance from the previous 3 years, known as carry forward.
A SIPP can accept transfers from other types of registered pension schemes. In some circumstances assets may be transferred into the SIPP “in specie”. This means that, for example, quoted stocks and shares, commercial property, trustee investment plans (TIPs) and insured funds could be transferred to the SIPP without the need to sell the asset. This would avoid surrender costs and the cost of reinvestment under the SIPP. This may also facilitate contributions and tax relief even if you do not have the cash to make such contributions.
The SIPP will be able to provide you with benefits such as a tax-free pension commencement lump sum (PCLS) and an income from the age of 55. SIPPs tend to offer one of the widest ranges of retirement benefit options because of their flexible nature. As with other pension schemes it is up to the pensions provider to decide which types of benefits they want to offer. However, if the retirement benefits required are not offered by the scheme, it is possible to transfer to another scheme at any time. The options generally include, drawing income directly from the fund or buying an annuity with an insurance company.
Although currently it isn’t possible to withdraw the whole fund as income unless you have other secured pensions of at least £12,000, this is proposed to change in April 2015.
Other changes from April include being able to take any level of income from your pension fund and this of course also applies to SIPPs. This income will be taxed at your marginal rate for that tax year. You can either take all or some of the tax free element up front, or take some with each income segment as it is withdrawn from the fund, giving a great deal of flexibility in retirement.
Different types of SIPP
There are many types of SIPP product available and some offer more flexibility than others; some will only allow investments on their own investment platform, or a choice of investment platforms, whilst others will allow you to choose from the whole market.
The charging structures for each type of SIPP and provider will also differ so comparison is not always very easy. However if you are looking to purchase a commercial property, there is no point in looking at the charges of a SIPP that only offers investment via a platform.