So what is a SIPP pension? A Self Invested Personal Pension (also known as a ‘SIPP’) is essentially a type of tax-free wrapper in which you hold a wide range of permitted investments, and the contribution limits, tax reliefs, eligibility and the age at which you can start drawing an income are all the same as other pensions.
SIPPs are being used by a rising number of private investors keen to take control of their retirement planning. SIPPs have evolved since they were first introduced in 1989 into the favoured investment vehicle for individuals seeking more control and flexibility in their retirement planning.
SIPPs are available to all investors who choose to invest into a private pension, but they have one distinctive element: they allow the investor to self-invest, or to take control of the pension.
Investing in a SIPP is a tax-efficient way to save for your retirement. Not only do your investments grow free from Income Tax and Capital Gains Tax, but you are also eligible for tax relief up to 45%.
Saving for a retirement via a SIPP pension puts you in control of your financial future
Just like any other kind of pension, Self-Invested Personal Pensions are designed to help you save for retirement and take an income when you reach it. Any individual who is resident in the UK under the age of 75 may make contributions to a SIPP, and in certain circumstances non-UK residents who have had UK earnings in previous years may also be eligible.
An individual may be a member of as many pension schemes as they wish, and contributions may be paid directly by the member, their employer and by transfer of previous pension plans.
Saving for a retirement via a SIPP pension puts you in control of your financial future.
SIPPs are one of the most tax-efficient ways of saving for retirement.
You can invest up to the annual allowance for tax relievable pension contributions (currently £40,000). As always, please bear in mind that tax relief will depend on your individual circumstances, and tax laws may change.
Effectively, whenever you contribute into a pension, the Government will give you tax relief calculated on your gross contributions based on the tax band you are in. Each tax band will get a different percentage, but it is a great boost to help you save for the future.
Non-taxpayer: Even if you don’t pay Income Tax, you’re still entitled to tax relief at the same rate as a basic-rate taxpayer. The maximum you can claim relief on is £2,880 per tax year. If you contribute £2,880, you’ll receive £720 tax relief, making the overall contribution into your SIPP £3,600.
Basic-rate taxpayer: entitled to 20% tax relief which is added to your pension pot.
Higher-rate taxpayer: entitled to 40% tax relief. Your SIPP will claim 20% and add this to your pension pot, but you will need to claim the further 20% through your tax return. The tax relief claimed from your tax return will not be automatically added to your SIPP.
Additional-rate taxpayer: You are entitled to 45% tax relief. Your SIPP will claim 20% and add this to your pension pot, but you will need to claim the further 25% through your tax return. Tax relief claimed from your tax return won’t be automatically added to your SIPP.
Flexibility over where your money is invested to fit in with your overall investment strategy
Self Invested Personal Pensions are likely to be most suited to experienced investors who are comfortable choosing and managing investments themselves. You need to have the necessary skills to invest your own pension fund, and you must remember that the value of investments can fluctuate, so you could get back less than you invested.
Investing your retirement savings in a SIPP may not be for everyone, however. If you are uncertain as to what type of investment to invest in, then you should seek professional financial advice.
Most SIPPs allow you to select from a range of assets, such as:
- Unit trusts
- Investment trusts
- Government securities
- Insurance company funds
- Traded endowment policies
- Some National Savings and Investment products
- Deposit accounts with banks and building societies
- Commercial property (such as offices, shops or factory premises), but not residential property
- Individual stocks and shares quoted on a recognised UK or overseas stock exchange
Although SIPPs offer greater flexibility than traditional pensions schemes, they often have higher charges and the time involved in research means they may be more suitable for experienced investors or via professional financial advisers.
Deciding the investment freedom and flexibility you need.
A Self-Invested Personal Pension could be right for you if you are looking to build up a pension fund in a tax-efficient way and prepared to commit to having your money tied up. You need to understand that the value of your investments can fall as well as rise.
Right for you if:
- You want to build your pension pot tax-efficiently
- You’re comfortable with the risk involved
- You’re prepared to have the funds tied up for a long time – normally until you’re at least 55
Wrong for you if:
- You might want access to the money before you retire
- You’d be nervous when faced with market volatility
The amount of contributions you can make each year, which attract SIPP tax relief.
Every year, you receive an allowance for making contributions into a Self-Invested Personal Pension. The Government sets this limit because your pension contributions are topped up with tax relief.
There’s a limit on the amount of contributions you can make each year which attract tax relief. For most people, this is currently £40,000 per tax year, or 100% of your earnings, whichever is the lower. If you have enough income in the current year, you can increase contributions by any unused allowances for any of the last three tax years, if you belonged to a pension scheme at that time.
The usual £40,000 annual allowance is cut for people with annual earnings of more than
£150,000. The allowance reduces by £1 for every £2 earned above £150,000, down to a minimum of £10,000 for those earning more than £210,000.
Non-taxpayers and children can currently also make pension contributions of up to £2,880 a year (making £3,600 with basic-rate tax relief).
- Your annual allowance will be reduced if:
You have drawn a taxable sum from a personal pension (in which case, the amount that you can pay into pensions and receive tax relief reduces to £4,000 per tax year), or 100% of your income – whichever is lower
- If you earn over £110,000 and your income and pension contributions made on your behalf exceeds £150,000, your annual allowance will be tapered
You can either pay lumps sums into your SIPP, or you can make regular contributions – whichever suits you best. Your employer or anyone else can also make contributions into your SIPP on your behalf.
Transferring other pensions into a Self Invested Personal Pension.
If you have a UK registered pension scheme with another company, you can transfer its value into your pension fund. However, by transferring benefits from another pension provider into your Self-Invested Personal Pension, you may give up the right to guarantees over the kind of benefits, the amount you will receive and the level of increases that will be applied to your pension in the future.
Your existing pension provider may apply a penalty (or other reduction in the value of your benefits) if it is transferred. There is no guarantee that you will be able to match the benefits that you give up by transferring your pension.
If you are in any doubt about the benefit of transferring, you should seek professional advice before arranging the transfer.
SIPP TRANSFER TO ANOTHER PENSION SCHEME
You can transfer the value of your SIPP to another UK registered pension scheme at any time. If you have started taking benefits from your SIPP, then you must transfer the whole of that part of your fund from which you are drawing benefits to your new scheme.
Major shift in how you can access your pensions.
New rules about pensions came into effect on 6 April 2015, providing more choice for anyone who has a private or occupational money- purchase pension.
While you can still convert your pension into an annuity or invest it in a drawdown product, the new rules also enable you to withdraw the entirety of your pension, either as a lump sum or a series of withdrawals, subject to Income Tax above the first 25%.
However, bear in mind that if you withdraw too much from your pension in one go, it could move you into a higher Income Tax bracket.
From the age of 55:
- You can take a pension commencement lump sum, and/or;
- Start taking your pension income at any time, even if you are still working
You may start taking a pension income before age 55 only if you are forced to take early retirement through ill health or you have a protected pension age.
Since April 2015 (subject to your pension scheme rules), for most pension investors aged at least 55, you will have total freedom over how you take an income or a lump sum from your pension.
- You can choose to take your entire pension pot as cash in one go – 25% tax-free and the rest taxed as income
- Take lump sums, as and when required, with 25% of each withdrawal tax-free and the rest taxed as income
- Take up to 25% tax-free and then a regular taxable income from the Either via income drawdown (where you draw directly from the pension fund, which remains invested and is known as a ‘flexi-access drawdown’) or via an annuity (where you receive a secure income for life)
- A combination of the options
You can withdraw some or all of the money held in a money-purchase workplace or personal pension. This is providing you are over the age of 55 and have not already begun to draw on your pension or bought an annuity.
Helping you make the most of the new pension freedoms rules.
Drawdown allows you to take income directly from your pension fund without the need to purchase a lifetime annuity. In turn, this allows your pension fund to remain invested in the assets of your choice whilst taking an income.
Income drawdown is a way of using your pension pot to provide you with a regular retirement income by reinvesting it in funds specifically designed and managed for this purpose. The income you receive will vary depending on the fund’s performance – it isn’t guaranteed for life.
You can normally choose to take up to 25% (a quarter) of your pension pot as a tax-free lump sum. You then move the rest into one or more funds that allow you to take an income at times to suit you. Some people use it to take a regular income. The income you receive might be adjusted periodically depending on the performance of your investments.
There are two main types of income drawdown products:
- Flexi-access drawdown – introduced from April 2015, where there is no limit on how much income you can choose to take from your drawdown funds
- Capped drawdown – only available before 6 April 2015 and has limits on the income you can take out; if you are already in capped drawdown, there are new rules about tax relief on future pension savings if you exceed your income cap
There is no upper age limit on how long you may stay in drawdown, but death benefits will change when you reach age 75 if you have not withdrawn all your benefits by this point.
Although drawdown allows people more flexibility with their pensions, income drawdown products are complex. You should always seek professional financial advice before committing to one.
Nominating who you want the payments to go to.
If you die, your Self-Invested Personal Pension benefits will be paid to your beneficiaries – either as a lump sum or an ongoing pension. You’ll need to complete a nomination form declaring who you want the payments to go to. The tax treatment of any death benefits paid from your SIPP will depend on your circumstances.
IF YOU DIE BEFORE THE AGE OF 75
Upon receipt of a death certificate, the investments held under your SIPP will be realised and their full cash value used to provide benefits for your spouse or registered civil partner, dependents, family members, or other beneficiaries nominated by you for this purpose.
The scheme trustees will decide who will receive benefits and the form of the benefits, in their absolute discretion. However, they will consider any wishes you would have expressed through the completion of a death benefit expression of wish. You may complete a new nomination at any time.
A beneficiary can usually elect to receive their benefit as a lump sum or a flexi-access dependent’s pension. Alternatively, they may be able to use it to purchase a dependent’s annuity with an insurance company of their choosing.
Payments of death benefits are normally free of any Income Tax or Inheritance Tax, but there is no guarantee that this will be the case.
Any amount of the fund over your personal lifetime allowance may be subject to a tax charge, which will be determined by your personal representatives. If a beneficiary dies whilst still in receipt of the death benefits you bequeathed them, then the remaining benefits will be paid to a successor.
The successor or successors will be selected by the scheme trustees in their absolute discretion and can be anyone appointed by the beneficiary or selected by the scheme trustees considering the beneficiary’s personal circumstances.
IF YOU DIE AFTER AGE 75
If you die after age 75, then the process is the same as described above. A tax charge will be levied upon payment of the benefits, however.
Payments will be taxed in accordance with PAYE based on the recipient’s marginal rate. If you do not leave a surviving spouse, registered civil partner or dependents, then the value of your fund may be paid to a charity nominated by you for this purpose. Any funds paid to a charity will be exempt from tax.
If you die after the age of 75, any subsequent payment of death benefits is not subject to the lifetime allowance.
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