Self Invested Pension Plans - FAQ
A SIPP is a personal pension that allows you to select and manage your own investments, offering a great, tax-efficient way to save for your retirement. In this section we explain how SIPPs work.Listed below are a number of the most commonly asked questions about SIPPs and the relevant answers.
A. Self-Invested Personal Pensions (SIPPs) were launched by the Government in the 1989 Budget to allow independent investors to choose and control their own investments in a form which is virtually free of tax. There is no income tax on income arising on investments and no capital gains tax. This gives the individual more control and flexibility than other pension arrangements.
Q. What are the benefits of SIPPs?
A. There are many benefits, including the following:
- The full fund value is available on death before retirement, which can normally be paid as a lump sum free of Inheritance Tax.
- You receive full tax relief at your highest rate on all personal contributions (subject to Inland Revenue limits).
- Your pension fund accumulates free of income tax or capital gains tax for the chance of greater growth.
- Up to 25% of your pension fund may be taken as a tax-free cash sum at retirement, depending on contribution method.
- You do not have to actually retire from work to take your benefits - a pension may normally be taken any time between the ages of 50 to 75.
Q. What tax relief will I receive?
A. The amount you contribute is net of basic rate tax and you can reclaim the tax on this contribution from the Inland Revenue. If you are a higher rate taxpayer you should reclaim the higher-rate directly from the Inland Revenue.
Q. Why a Self-Select Pension?
A. No other form of investment beats the tax-efficiency of an approved pension scheme. The Self-Invested Personal Pension gives you an economical way to control the investment risk, strategy and performance of your own pension arrangement.
The problem with conventional pension arrangements is that, once invested, your contributions are beyond your control until you are ready to take retirement benefits. You are locked into the investment performance of your chosen pension manager. With-Profit contracts can be particularly difficult to reconcile. You could transfer to another scheme, but why suffer heavy cash penalties and further setting up charges on the new arrangement?
Q. Can I transfer from existing pension funds to a SIPP?
A. Yes. But you must obtain advice on the suitability of transferring existing schemes into your SIPP. Pension provision is a complex area for clients, and we strongly recommend that clients should first take independent financial advice.
Q. Do I ever have to purchase an annuity with my SIPP?
A. Current legislation requires that you purchase an annuity on or before reaching the age of 75. However after 'A' Day, 25% tax-free cash can be taken from your SIPP without an annuity having to be purchased at the time and even at age 75 an annuity will still not need to be purchased.
Q. Although "Self-Invested" can you introduce me to someone who will manage my SIPP?
A. Yes. Not every client has the confidence, or wishes to run his or her fund without help and we are happy to provide an introduction to suitably qualified partners.
Q. Can my SIPP buy assets from me that I already own?
A. No. You cannot transfer any existing assets that you own into your SIPP, however after 'A' Day your pension fund will be able to buy property that you already own. This could be a way of getting tax relief and freeing up cash, but existing pension funds can also help fund the purchase, and if you currently own equities or unit trusts, these can be transferred into your SIPP in the same way. However professional advice should always be sought.
Q. How do I fund my SIPP?
A. You can transfer in existing pensions, and use the funds for self-investment in property. You can pay cash into your SIPP, and get full tax relief. It is vital to pay in lump sums now and use your allowances pre 'A' Day as from 'A' Day funding rules will change and usually new limits are higher.
Q. Can I transfer Properties and other assets into my SIPP?
A. Yes, existing pension funds and cash can be paid into your SIPP as can assets in existing SIPPs can be transferred in. However, properties and other assets can not be directly transferred-in but your SIPP can buy these assets from you.
Q. Can I borrow money to buy property?
A. Yes, SIPPs can borrow money to buy property, just like having a normal mortgage. The interest rate charged will be the commercial rate at the time and after 'A' Day the SIPP can borrow up to half the fund value it already holds. If, for instance, from transfers and lump sums, your SIPP had £300,000 in it, it could borrow £150,000, giving £450,000 for self-investment.
Remember the SIPP has to pay interest to the lender which would usually be covered by the rental income of the assets otherwise, you would have to pay into the SIPP to meet this charge but you would get full tax relief on the payment
Q. What happens to funding levels and the Earnings Cap?
A. The Earnings Cap ceases on 'A' Day and you can pay in the greater of £3,600 per annum or your entire income and your employer can pay in up to £215,000 per annum with the benefit that you get tax relief on it all.
Q. What happens to the Lifetime allowance?
A. The Lifetime Allowance is the total maximum allowed in all pensions and is initially £1.5M in 2006/2007. Where you have Final Salary benefits these will be 'converted' into a fund for the purpose of this calculation only. If you already have funds of over £1.5M, or are likely to build up funds larger than this, you can 'protect' the larger amount. If the funds are not protected a tax charge will be incurred. 'Protection' for your pension funds can save you significant tax charges. If your fund is likely to be above the Lifetime Allowance, you need help. You have 3 years to protect your pension, but you must start planning now.
