Self-Invested Personal Pensions (SIPPs) are subject to the normal rules and regulations for registered pension schemes, but offer the freedom of choice over investment management, whilst keeping the administration in one place. This means that you are able to change the investment manager when you wish, without incurring the expense of changing the provider of the administration.
Additionally, you can achieve greater flexibility in the benefits you can take during retirement without necessarily having to transfer your funds again. You can elect to purchase an annuity or follow the route of phased retirement and/or drawdown pension. There is now no upper age limit at which benefits must be taken.
You are free to give direct investment instructions, or more typically, indirectly via an appointed investment manager or adviser.
Most types of conventional investments are freely permitted including:
- Quoted stocks and shares
- Unit trusts
- Insurance policies
- Commercial property (some restrictions designed solely to prevent abuse)
- Some bank and building society accounts (if the bank/building society can accept the Self-Invested Personal Pension as the account holder
- Corporate Bonds
- Permanent interest bearing shares (PIBS)
- Warrants and Covered Warrants
- Investment Trusts
- Exchange Traded Funds (ETFs) and Exchange Traded Commodities
- Residential property – any investment (direct residential property and investment through a residential property pooled investment are both prohibited)
- Fine wines
- Classic cars
- Art & antiques
- Loans to the Self-Invested Personal Pension member on any basis
If a SIPP directly or in directly or indirectly purchases a prohibited asset the purchase will be subject to an “unauthorised member payments charge”. This will recoup all tax relief given on the amounts used to purchase the asset. Broadly, this means that it is ‘at least’ no more advantageous to hold such assets in a pension scheme than it is to hold them personally. This means that:
- the member will be subject to an income tax charge at 40% on the value of the prohibited asset
- the scheme administrator will become liable to the scheme sanction charge, which will usually be a net amount of 15% of the value of the asset
- if the set limits are exceeded the cost of the asset may also be subject to the unauthorised payments surcharge, which is a further charge on the scheme member of 15% of the value of the asset
- if the value of the prohibited asset exceeds 25% of the value of the pension scheme’s assets, the scheme may be de-registered which would lead to a tax charge on the scheme administrator on the value of the scheme assets at the rate of 40%
Loans and Borrowing
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 will be able to borrow for any legitimate purpose intended to further the aims of the scheme and such borrowing will be limited to 50% of the scheme’s net assets at that time.
Contributions to Personal Pensions generate direct tax savings. Contributions are made net of basic rate tax relief, which means that you will only actually contribute £80 net for every £100 of contributions paid. Higher and additional rate taxpayers likewise make contributions net of basic rate tax and can then claim additional relief via their Inspector of Taxes/Self Assessment return.
A 40% taxpayer therefore only contributes £60 for every £100 of contributions falling within the higher rate band and a 50% taxpayer only contributes £50 for every £100 of contributions falling within the additional rate band. These figures assume basic rate tax of 20%, higher rate tax of 40% and additional rate tax of 50% (2012/13).
Your pension contributions once made will be invested in funds where there is no liability to tax on capital gains and where all forms of investment income (except dividends) are also tax free. Your money may therefore grow faster in a Personal Pension than in most other forms of investment.
Should your employment situation change of course and an alternative pension arrangement becomes available to you, it is essential that you contact me without delay so that any necessary changes to your pension arrangements can be made.
Given the many tax advantages that are available with regard to funding a personal pension there are limits to the contributions that can be paid. Employees are able to make contributions of up to the greater of £3600 or 100% of their annual earnings to all of their pensions each tax year.
However, where the total employer and/or employee contribution exceeds the Annual Allowance a tax charge will apply. Depending on your taxable income the excess pension savings can be charged to tax in whole or in part at 50%, 40% or 20%. For the 2012/13 tax year the Annual Allowance has been set at £50,000. However it may be possible for contributions in excess of the Annual Allowance to be paid in some circumstances under the rules which allow unused Annual Allowance from the 3 previous tax years to be brought forward and added to the current year’s Annual Allowance.
The earliest age upon which you can take benefits is age 55.
At retirement you have the option to take up to 25% of the fund as a tax free cash lump sum. There is now no upper age limit by which retirement benefits must be taken.
If the total value of your pension benefits exceeds the “Lifetime Allowance” the excess will be subject to a tax charge of up to 55%. For the 2012/13 tax year the Lifetime Allowance is £1.5 million.