What is the difference between a personal pension and a SIPP?
A Self-Invested Personal Pension (SIPP) operates in the same way as a personal pension in terms of contributions and tax relief, however it offers much more investment flexibility. With a personal pension the member has very little or no investment choice as their contributions are normally invested in a range of funds offered by the insurance company that provides the pension. A SIPP on the other hand offers the member the freedom to choose their investments and hold them directly in their pension plan.
What are the benefits of a SIPP?
• Investment flexibility: A SIPP is a flexible type of pension that gives you the freedom to choose where to invest your pension savings. While traditional personal pensions would normally be invested in certain pre-determined asset classes, a SIPP allows you to take control and give your savings the best chance of investment growth to provide for your ideal retirement. HMRC allows SIPP investment in a wide range of assets, including stocks andshares, unit trusts, and even commercial property.
• Tax-effective saving: It can be difficult to save for the future when there’s so much to pay for today, but pensions are designed to help you to grow the money you put away. As an incentive to save for your retirement, the Government will give you tax relief on the contributions you make to your pension. The current basic rate tax relief system works by making every £80 you pay into your pension up to £100. This applies to the personal payments you make to all pension plans you have up to £2,880 (which totals £3,600 with tax relief) or 100% of your UK taxable earnings, whichever is greater.
20% basic rate tax relief is automatically added to your SIPP when you make a contribution, and if you are a higher or additional rate tax payer you may be able to reclaim even more through your tax return. It’s up to you whether you add this to your pension too.
As well as this your SIPP funds can grow free of UK Capital Gains Tax and Income Tax.
This tax relief means that £1,600 of your money becomes £2,000 in your pension and you could claim up to an extra £600 if you are a higher or additional rate tax payer:
Your contribution: £1,600
Basic rate tax relief automatically added: £400
Higher rate tax relief claimed back via self-assessment: up to £400
Additional rate tax relief claimed back via self-assessment: up to £200
Based upon Pointon York SIPP Solutions Limited’s understanding of the tax rules at April 2011, which can change. Entitlement to tax relief is dependent on individual circumstances, and higher / additional rate tax payers will need to pay sufficient tax at these higher rates to claim the full amounts of extra relief.
• Pension consolidation: As your career progresses, you may build up a number of pension pots in different job roles that are difficult to keep track of and might not be performing as well as you’d like. A SIPP is an ideal way to manage all of your pensions in one place and take control of their potential for growth.
• Flexible retirement options: A SIPP offers you a range of options at retirement, including the opportunity for your pension to remain invested while you are drawing an income.
What can I invest in via a SIPP?
HMRC specifies which assets can be held in a SIPP, including:
• Stocks and shares quoted on a HMRC recognised Stock Exchange*
• Securities listed on the Alternative Investment Market (AIM)
• Deposit accounts
• Unit trusts, Open Ended Investment Companies (OEICs), and Investment trusts*
• Trustee investment bonds
• Fixed-interest securities
• Futures and options
• Traded second-hand endowments
• Unquoted shares (subject to certain restrictions)
• Commercial property (though not residential property)
• Gold bullion
*If the underlying investments include residential property certain conditions must be met.
The range of permitted investments will vary according to the SIPP provider and type of SIPP. Full individual SIPPs from independent providers will usually offer the most investment flexibility, with some offering access to all HMRC allowable assets. Online and simple SIPPs will often offer a limited investment choice, and hybrid SIPPs and those administered by insurance companies may be restricted to the provider’s own insurance company funds or a more limited range of assets. It is important to assess how much investment flexibility you need before you decide which SIPP to open.
What can’t I invest in via a SIPP?
HMRC allows SIPP investment in a wide range of assets, however there are a few investments that cannot be held within a SIPP. The main ones are residential property, loans to connected parties and tangible moveable property. This covers objects that can be touched or moved such as classic cars, fine wines and works of art. All investment decisions must also be made in the best interests of the SIPP (rather than the member in their personal capacity). For example the purchase a piece of land next to a member’s house may attract tax charges because the transaction is likely to be more for the benefit of the member personally than the SIPP, as the purchase allows them to protect and control their boundary.
I’m a director of a company, can I hold my business property in a SIPP?
Yes, holding your business property in a SIPP is permitted by HMRC rules (provided the property has no residential function) and it can be a great way of sheltering the property from Capital Gains Tax and using the rent payable to build your retirement fund. Property investment is usually accessible via a full SIPP, however may not be offered by lower-cost alternatives.
What types of SIPP are there?
No two SIPPs are the same; they vary by flexibility of permitted investments, fees, and services offered by the provider. However they can be classified into the general groups of full SIPPs, mid-range SIPPs, simple SIPPs, hybrid SIPPs, and Family SIPPs.
A Full SIPP is a SIPP in its purest form, allowing every investment permitted by HMRC rules. Annual Administration fees for full SIPPs can range between £400 and £800 because they are complex to administer.
A mid-range SIPP will usually offer access to the whole of market, however it will often be restricted to certain types of permitted investments or to the number of assets held. Fees will be lower than for a full SIPP to reflect the restricted investment options.
Simple SIPPsare often available to apply for and manage online and are sometimes referred to as e-SIPPs. They will usually offer access to an extensive range of funds, which are normally restricted to quoted investments. Due to the level of automation and the lesser complexity of investment administration, fees are often low, making them ideal as a ‘starter’ SIPP.
A hybrid SIPP is a cross between a traditional personal pension scheme and a SIPP. These plans are generally offered by insurance companies and investments tend to be via insured funds. They may appear to have low fees, however be aware that they will often take a percentage of funds under management and the charges on the insurance company funds may not be fully transparent.
Family SIPPs are highly bespoke pension plans designed for sophisticated retirement and tax planning. They are set-up as independent pension schemes and can have multiple members, making them ideal for families and close business associates to combine purchasing power and make common investments. They will permit all HMRC allowable investments and sometimes offer Scheme Pension, an additional option for taking an income at retirement which is tailored to the individual. Because of their bespoke nature, Family SIPPs are usually expensive to run.
Which SIPP is right for me?
Which SIPP is right for you will depend on a number of variables including the investment flexibility you desire, how much you are willing to pay in fees, your financial situation and existing pension savings, the level of service you expect from the provider, and the online functionality you need. Navigating through the extensive choice of SIPPs on the market yourself can be difficult and confusing, but a financial adviser can thoroughly assess your needs and recommend a SIPP to suit you.
You can find an adviser in your local area at http://www.unbiased.co.uk.
Who can open a SIPP?
UK residents under the age of 75 should be eligible to contribute to a SIPP. You could also be eligible if you have lived in the UK during the current tax year, if your earnings have been chargeable to UK income tax or if you or your spouse is a Crown Servant based overseas. Those who do not meet these criteria may be able to transfer a UK registered pension scheme to a SIPP, however you will not usually be able to contribute to the SIPP, therefore it is wise to seek financial advice to ensure you will not be losing any existing benefits by transferring.
How do I choose a SIPP provider?
There are a number of things to consider when choosing a SIPP provider besides fees. Firstly you may want to assess the provider’s reputation and experience in SIPPs. If the provider is well established and specialises in SIPPs, you are likely to receive a professional and knowledgeable service. Some providers can offer considerable experience in administering complex SIPP investments and have the flexibility to adapt to your needs, so it’s always wise to do your research. You should also consider the firm’s expertise in the investments you are interested in. If you have a joint property purchase in mind for instance, you might want to consider a provider with experience in administering complex property arrangements.
As with anything, customer service will be important. Does the provider have positive testimonials to back up their service claims? And do they publish a set of service standards so that you know what processing times to expect? A helpful customer relations department with strong technical knowledge bodes well for a smooth customer experience.
Finally, you might want to consider the provider’s technology, innovation and online functionality. If they are forward-thinking with streamlined systems and an online facility that allows you to monitor and manage your SIPP you’ll benefit from the efficiencies.
Isn’t the Basic State Pension enough?
You are entitled to the Basic State Pension if you’ve paid enough National Insurance, but this stands for the 2011/2012 tax year at a maximum of just £102.15 per week for single individuals and £163.35 per week for married couples. Think about the lifestyle you’re looking forward to in retirement; will £8,494.20 per year be enough to support it?
While you can access a SIPP from age 55, State Pension age currently stands at 65 for men and 60 for women, increasing to 66 for both men and women by 2020, and it’s likely that it will rise faster and sharper than originally predicted.
How much and how often do I pay into a SIPP?
Ultimately, it’s up to you how much and how often you contribute to your SIPP. However, it is important that you consider the impact of charges on any contributions you make. You can use this Pension Protection Tool to give you a guide to the size of contributions you might need to make.
It is strongly recommended that you review your retirement options with an independent financial adviser, who will be able to provide you with advice on how much you should contribute to achieve your future financial aspirations.
It is important to note that SIPP providers may require members to keep a minimum amount in their SIPP bank account at all times and certain SIPP products will carry minimum levels of investment. Some providers may specify minimum contributions; however there is often flexibility around the frequency of these contributions.
HM Revenue & Customs (HMRC) also sets limits to the amount of tax relief you can receive on your pension contributions. For the 2011/12 tax year the Annual Allowance is £50,000. This means that you will receive tax relief on up to £50,000 of contributions across all of your pension schemes. This includes contributions by those other than yourself, such as your employer.
There is currently a cap of £1.8 million which the total value of all your pensions must not exceed. When you reach 75 or come to take benefits from your pension, you are likely to incur a substantial tax charge on anything exceeding this Lifetime Allowance. This allowance is reducing to £1.5 million in April 2012, however those reliant on the current £1.8 million allowance can apply to HRMC for protection, click here for more information.
How do I choose my SIPP investments?
SIPP providers do not offer investment advice as part of the SIPP package so you should seek financial advice if you are not confident making your own investment decisions. However some simple SIPPs with restricted investment options may automatically invest you into a fund based on your attitude to risk as assessed by a questionnaire.
Can I change my investments?
Yes. A SIPP enables you to choose and change your investments when you want. There are of course risks associated with investment which mean that the value of your assets can fall as well as rise so you may not get back what you initially invested.
How do I contribute to my SIPP?
There are various ways to pay money into your SIPP depending on the provider, including cheque, BACS, CHAPS, debit / credit card and standing order. Some SIPP providers even allow you to contribute assets you already own in specie, or sacrifice part of your salary to build up your SIPP.
Can I open a SIPP alongside other pension schemes?
Absolutely. There are no limits to the number of pension schemes you can be part of, although tax rules will apply to your total pension savings across all schemes. It is a good opportunity to review whether you really want multiple pension schemes, as a SIPP can be a great way to monitor all your funds in one place. You will need to take financial advice before transferring a Final Salary, Defined Benefit, or Money Purchase scheme into a SIPP however.
To find out about old pension schemes, the Government offers a tracing service: http://www.thepensionservice.gov.uk
Can I transfer savings from my existing pensions into my SIPP?
If you have already built up pensions elsewhere, you can consolidate all or some of them in your SIPP. It is a good idea to take financial advice before making a decision to ensure that you choose the best option for your savings.
Can I transfer funds from my cash ISA into my SIPP?
Unfortunately rules do not currently permit this, however you may be able to use cash held in your ISA to contribute to your SIPP if you are willing to surrender its ISA status.
Will I receive statements?
In order to plan for when you retire, it is helpful to have a good idea of how much income you can expect to get from your pension. When you can expect to receive statements will vary from provider to provider, but you will normally receive a valuation at least once a year to keep you up to date with the value of your pot. Some providers also offer access to your account online so you can keep a watchful eye on your retirement fund.
Can I withdraw my money at any time?
No, the money that you pay into any type of pension is reserved exclusively for retirement, giving you peace of mind that you have something put aside for when you retire. You can withdraw funds from a SIPP at age 55, which is earlier than you can access the Basic State Pension.
When can I withdraw an income for my retirement?
SIPP rules enable you to take your pension at any time after age 55.
What are my retirement options?
When you retire you can use the savings that you have accumulated in your SIPP and any other pensions that you have built up elsewhere to provide you with an income for the rest of your life.
There are different ways that you can do this, which means you’ll need to make some decisions about which option will suit you best. You should seek financial advice to help you make the right decision.
Tax-free lump sum
When you decide to retire, you can normally take up to 25% of the value of your pension pot as a cash lump sum without paying any tax. It’s up to you how you take the rest of your fund as a pension. Your options are set out below.
You can buy a guaranteed retirement income known as an annuity from a UK insurance company. You will be told at outset how much retirement income you can buy with your pension savings, and this amount is guaranteed for life with no additional ongoing charges.
Alternatively you can take income drawdown direct from your SIPP to provide a retirement income while keeping your pension invested as you choose. Your pension has the potential to increase or decrease in value during retirement and so your income is not guaranteed. You can also draw these benefits gradually through phased retirement.
There are a select few SIPP schemes, such as the Pointon York Family Trust, that offer the option to take Scheme Pension. Your income will be individually calculated by an Actuary who will take your health into account as well as your age (annuities are based on age alone). This ensures that you get the most out of your pension, and could mean that you could draw more income, especially if you are in ill health.
What if I die before retirement?
It’s not a nice thought, but it’s good to know that your savings can be distributed according to your wishes. Your pension can normally be paid out to your nominated dependents, which is decided by you via an Expression of Wish form.
Do I need a financial adviser to open a SIPP?
Deciding if a SIPP is right for your circumstances and how to invest your money within a SIPP are important and complex decisions. A financial adviser will be able to assess whether a SIPP is in your financial interest, as well as if there are any risks associated with transferring out of existing pensions you may have. They will explain how much you need to contribute to fund your ideal retirement, evaluate your attitude to risk and advise you how to invest your pension. You will however need to be prepared to pay fees for this advice.
As a SIPP is a complex financial product, it is recommended that you seek financial advice, and some SIPP providers may insist that you have an adviser. However in other cases you will be able to open a SIPP without one if you can evidence that you are a sophisticated investor.
You can find an adviser in your local area at http://www.unbiased.co.uk.
How do I start a SIPP?
IF you are taking control of your pension yourself, unaided by an adviser, you will need to start your SIPP with a contribution. There will be various forms to fill in, some may be paper-based, others may be online, and your SIPP provider will be able to send you these. If you have a financial adviser, they will coordinate your application.
Will there be fees to administer my SIPP?
There will be fees to administer your SIPP, although the level will depend on the type of SIPP you choose and the activity you undertake in it. Generally speaking, the SIPPs that offer the greatest functionality and investment choice will charge the highest fees, while simpler online SIPPs with restricted investment options will charge less.
When you set up a SIPP you will usually have to pay a one-off establishment fee, and you may be charged to transfer money in from another pension or to make a contribution. You will then normally have an annual administration charged once a year to cover the day-to-day administration of your SIPP. There are likely to be fees associated with making investments, and some providers may take a percentage of funds under management. Fees will be charged when you come to take benefits at retirement, and you should check whether there will be an exit fee if you decide to transfer to another pension.
Most SIPP providers display their charges online in a Fee Schedule, however you may need to contact the provider directly if they do not clearly list all fees.
What happens if I can’t make contributions?
There is no obligation to make contributions to a SIPP under HMRC rules so you can stop any time you want to. You should bear in mind though that the provider will likely continue to take charges, so your pension pot won’t grow as much as usual. It could even mean that the value of your pot falls if the charges account for more than the growth in the funds you invest in.
Can I open a SIPP in joint names?
Family SIPPs tend to be the only type of SIPP that you can open in joint names. However some providers will allow you to make joint investments in their standard products, for example joint ownership of property split between SIPPs.
Can I open a SIPP for a child?
Yes you can, or you could share one via a Family SIPP. Most people, including children can receive basic rate tax relief on contributions up to £3,600, even if they have no taxable earnings. This means the net cost of this sized contribution would be just £2,880.
If you make a contribution on the child’s behalf, it will count towards their limits and not your own, therefore the amount you can contribute to your own SIPP will remain unaffected.
Are there any compensation arrangements to cover my SIPP?
Yes, The Financial Services Compensation Scheme (FSCS) is there to handle compensation if firms are unable to meet claims made against them. You can find out more about the FSCS at http://www.fscs.org.uk.
Where can I find more information?
This is the website of The Pensions Advisory Service, an independent non-profit organisation that provides free information and guidance on pensions.
This is a government website which provides information about all public services, with areas dedicated to pensions and retirement planning.
This is the website of HM Revenue & Customs, which provides details of the tax legislation surrounding pensions.
If you need to find a financial adviser, you can use this website to locate one in your area.
This is the website run by the UK’s Consumer Financial Education Body to provide impartial information on money matters.
This is a government website that offers a pension tracing service. This could be useful if you want to find old pensions or consolidate schemes in your SIPP.
If you want to know more about Pointon York and its SIPPs, you can visit this website.
To apply for a SIPP with Pointon York or view your latest fund valuation, login to the online portal.
This Ultimate SIPP FAQ has been produced by specialist SIPP provider, Pointon York.
Pointon York has been leading the way in the specialist pensions sector for over 40 years, gaining a reputation for delivering first class service and driving product innovation.
Pointon York offers a comprehensive range of flexible SIPP solutions with unrivalled choice from a low-cost online e-SIPP to an Individual SIPP and Family Trust with access to any HMRC allowable assets. With extensive experience of administering commercial property including joint ownership arrangements and syndicates; as well as alternative investments such as gold, forestry, carbon credits and unquoted shares, Pointon York’s expertise in complex investments sets it apart from other SIPP providers.
Pointon York is synonymous with high quality bespoke SIPPs and has been quietly helping customers succeed since 1971. http://www.pointonyork.co.uk
The contents of this document are not to be construed as legal, financial or tax advice and are based on our understanding of legislation and Revenue practice at the time of writing. Please be aware that the value of investments held in your SIPP can go up as well as down, especially over the short-term. Before making any financial decision we strongly recommend that you seek financial advice and ensure you understand the risks of your decision. Pointon York SIPP Solutions Limited is authorised and regulated by the Financial Services Authority.