A SIPP is a special type of Personal pension which provides you with greater
flexibility and choice. SIPPs are ideal for those who want to make their
own investment decisions.
Most personal pensions are provided by insurance companies and they generally
have limited flexibility and offer a limited range of investment options.
A Self Invested Personal Pension separates the legal structure and administration
from the investment manager. This means that you can make investment decisions
yourself and have a wider range of investment options. Your investments
can be managed by a professional investment manager or even by you.
By separating the administrative functions from the investment functions
SIPP provide a totally transparent and flexible pension plan.
The diagram below shows how the different functions are split.
Since April 2006, the restricted list of permitted investments has been replaced and now any investment that is deemed to be a commercial investment will be allowed. This means that drawdown plans will be allowed to invest in most assets including the following.
Initially, the Government was going to allow personal pension funds to invest in residential property and this created considerable interest from investors. However in December 2005, the Chancellor announced a U-turn by announcing that additional tax would be charged if a pension fund invested in residential property.
If a "self directed" pension invests in residential property or "prohibited investments" such as vintage cars, works of art or fine wines an extra charge will be applied.
A tax charge of up to 70% of the value of the prohibited investment can be levied.
This means that although it will be possible to invest in residential property the additional tax charge makes it an unattractive option.
There will a tax charge (Unauthorised payment charge) of 40% on any non-commercial use of an asset.
Wasting assets will incur an extra tax charge (scheme sanction charge) of 15%, if the investor has the use of this asset.
It will be possible to borrow up to 50% of the value of the SIPP e.g. for property purchase, but SIPPs cannot make loans to scheme members.
The types of investments that you will actually be able to invest in
will depend on the type of SIPP you have
All allowable contributions to pension plans enjoy tax relief at your marginal
rate of tax. This means that a basic rate tax payer who wants to contribute
£ 1,000 in to a personal pension will only have to actually invest
£ 800 because the tax relief is £ 200. Higher rate tax payers
can claim further tax relief through their self assessment.
If you are making personal contributions you can pay the net amount and
the SIPP provider will recover the tax relief. However all employer contributions
are paid gross and the employer will claim tax relief through the company.
If you are under the age of 75 and resident in the UK you may receive tax relief on your contributions and you should pay your contributions to the SIPP net of basic rate tax.
There is no limit to the amount you may contribute but tax relief will only be granted on contributions up to 100% of your earnings in any tax year. Tax relief is also limited by the annual allowance, which may include the total of the current annual allowance and any unused qualifying annual allowance carried forward from previous tax years.
If you do not have earnings you may contribute up to £3,600 gross (£2,880 net) in each tax year.
The maximum contribution, which can normally be paid to all pension schemes in respect of a member and receive tax relief in one tax year, is known as the annual allowance. The annual allowance for the 2011/2012 to 2015/2016 tax years is £50,000 per annum.
The annual allowance for previous years is set out below:
Tax relief on contributions in excess of the annual allowance can be obtained by using any unused annual allowance from the previous three qualifying tax years. This facility is called carry-forward. Any contributions paid after 5 April 2011, using unused annual allowance from the 2008/2009 to 2010/2011 tax years will be based upon a notional £50,000 annual allowance limit for each year, although the actual annual allowance was higher.
Employer contributions are unlimited and will receive tax relief in the year they are made, provided they are wholly and exclusively for the purposes of the employer’s trade.
If the total of your employer’s contributions plus your personal contributions exceeds the annual allowance and any unused qualifying annual allowance carried forward from previous tax years, then you will have to pay income tax on the excess.
There is a limit on the value of retirement benefits that you can draw from an approved pension schemes before tax penalties apply. That limit is called the Lifetime Allowance.
This is £1.8m in the 2011/12 tax year and for the tax years 2012 to 2016 £1,500,000
Pension funds must be tested against the lifetime allowance when they take benefits and at age 75 if benefits have not been taken.
Those with pension funds that exceed, or are likely to exceed the reduced lifetime allowance of £1.5 m from 6 April 2012, have until 6 April 2012 to apply for fixed protection.
At the time of payment, a recovery charge will be applied to the value of retirement benefits in excess of the Lifetime Allowance. The amount will depend on how the excess is paid.
If it is paid in the form of a pension, the excess will be subject to a 25% tax charge and the income will be subject to Income Tax.
If the excess is paid as a lump sum, it will be subject to a one-off 55% recovery charge.
This website is run by William Burrows, is for information only and does not provide specific financial advice.