Self Invested Personal Pension
What is a SIPP?
As it’s name implies a Self
Invested Personal Pension (SIPP) is a personal
pension that provides a policyholder with an
opportunity to invest in a wide range of
investments.
The policyholder will normally be
appointed as a joint trustee along with the SIPP
provider.
Who is it for and how do they
work?
A SIPP is relevant for an
individual who wishes to take greater control over
the investment of their pension scheme and is
available to anyone who is under the age of 75 and
is either:
- employed
- self employed
- a pensioner
- a carer
- in full-time education
- unemployed
Just like SSASs, SIPPs have been
very popular since their inception and
remain ideally suited for Shareholding Directors of
small to medium sized limited companies and the
owners of partnerships. They are also very popular
for individuals approaching retirement with
reasonable pension fund values and looking to
benefit from unsecured pension benefits (USP) and
additional flexibility.
Contributions
For each tax year, it is possible
to get tax relief on any contributions paid by
either the member, or on their behalf, of up to the
higher of:
- £3,600 (the basic amount), and
- 100% of UK earnings (up to the Annual
Allowance of £245,000 for 2009/2010 tax year)
If an individual does not have
any UK earnings, they can still contribute up to
£3,600 a year and receive basic rate tax relief. The
member only pays the net amount with tax relief
given at source.
An individual will receive tax
relief at their marginal rate of income tax on all
of their personal contributions (or any
contributions made on their behalf by a third party
[other than an employer]).
It is also possible to make a
contribution into a SIPP in the form of a commercial
property.
NB...it is very important that
you speak to an experienced financial adviser about
this option (if this is under consideration) due to
potential taxation issues that may arise.
NB...SIPP’s are ordinarily more
expensive than personal pension plans and tend to be
considered for more sizeable funds although this is
not a defining statement.
Benefits can be taken from age 50
(age 55 from 2010) and must be taken by age 75. If
death occurs before benefits are taken then the
whole of the fund can be paid to nominated
beneficiaries free of tax.
Can I
invest Protected Rights funds into a SIPP?
Yes, as from 1st October 2008.
Over 6 million people have contracted out of the
State Earnings Related Pension Scheme (SERPS) and/or
the State Second Pension (S2P) since this became
possible back in April 1989. New rules that came
into effect on 01 October 2008 now allow investors
willing to take their own investment decisions the
chance to invest the proceeds into more diversified
permitted investments via a SIPP.
If you have built up any Protected Rights funds,
then Ashton Hoyle can advise you on this new
investment opportunity. To find out more please
contact us.
What are Permissible Investments in a SIPP?
The trustees are responsible for
implementing an investment strategy although the
assistance of a professional adviser is usually
required. It is possible to invest in a broad range
of investment all of which are usually free from
income, corporation and capital gains tax. They
include:
- UK quoted stocks, shares gilts and
debentures
- Shares quoted on the Alternative Investment
Market (AIM)
- Stocks and shares traded on a recognised
overseas stock exchange
- Hedge funds
- Bank and building society deposits
- Unit trusts and investment trusts and OEICs
- Insurance company funds
- Real Estate Investment Trusts (REITs)
- Commercial land and property (directly and
indirectly)
Commercial Property & Land held in a SIPP?
It is possible for the SIPP to
invest directly in commercial land or commercial
property but not residential property.
This option has been very popular over many years
as it provides the opportunity to purchase a
property with funds that enjoy the benefit of tax
relief. There are a number of excellent benefits to
be obtained for business looking to set up a SIPP.
These are as follows:
- It is possible to purchase commercial
property from any source (unconnected, connected
or company)
- Where a property is purchased from the
business, this often results in assisting the
business with raising funds.
- It is possible to raise additional borrowing
to either purchase, improve commercial premises
(expansion) or purchase a number of commercial
properties/land
- The SIPP trustees can register for VAT, thus
providing an opportunity to reclaim any VAT paid
by the scheme
- The trustees, often the owners of the
sponsoring employer, retain control of the
property.
- Any property held within a SIPP is sheltered
from business creditors
- All rental income and capital gains are free
from taxation and any rental income paid by the
sponsoring employer is an allowable business
expense
- The property can be part-owned between the
business and the SIPP or the SIPP and any other
property owner, e.g. a shareholding director of
the sponsoring employer could sell part of
the commercial property to the SIPP and retain
personal control over the remaining share.
All property transactions must be conducted on an
arm's length basis. Where the property is being
purchased, sold or let to the sponsoring employer,
member or other connected person, then the value of
the property and assessment of the rental value must
be confirmed by an independent chartered surveyor.
Tax benefits?
There are various tax benefits available.
Contributions paid by an
employer/business on behalf of any member of a SIPP
are made gross and should be
allowable as an expense of the employer/business
against corporation tax providing certain conditions
are met and procedures followed. Contributions made
by an individual are paid net of basic rate tax with
higher rate relief (where applicable) being claimed
via a self assessment tax return.
Investments usually accumulate
free of any income and capital gains tax, and
a percentage of each member's share of the fund can
be paid out as a tax free lump sum from age 50 (55
from 06.04.2010) without the need to actually
retire.
As a result of the new pension
rules brought in on 6 April 2006 (known as A-Day),
flexibility and control can now be maintained
indefinitely as pension income can be paid out of
the accumulated funds for the life of the
policyowner.
Interest payments arising within
the scheme, rental income and capital gains are all
free of tax.
NB...The dividend tax credit of
10% cannot be reclaimed however a higher rate tax
liability could exist.
Can other funds be transferred
into a SIPP?
A SIPP can also receive transfers
from most other pension arrangements that a member
may hold, although we would recommend that financial
advice is taken prior to any transfer. It is
currently not possible for a SIPP to accept any
Protected Rights funds or monies from a
Contracted-Out Occupational Pension Scheme, (e.g.,
COSR scheme).
Can Shares be included in a SIPP?
There is also the option of
purchasing shares on and off the stock exchange. For
shares not on a recognised stock exchange there are
certain Inland Revenue requirement that need to be
met.
Certain information will be required to proceed
with the purchase in unquoted shares.
Retirement Benefits
There is no limit on the benefits
that may be provided from a SIPP. However, if the
total value of all an individual's pension savings
(under all registered pension schemes) exceeds the
'Lifetime Allowance' (£1.75m for tax year 2009/2010),
then there will be an additional tax charge (known
as the lifetime allowance charge) on any excess over
the £1.75m.
Tax Free Cash
A tax free lump sum can be taken
from any 'uncrystalised' fund at any time once the
policyowner reaches age 50 (55 as from 06.04.2010).
If the member has decided to
purchase an annuity or commence
full Unsecured Pension (USP), then
any tax free cash needs to be taken at outset, as it
is not possible to commence taking an income and
defer taking the tax free cash until a later date.
If a member does not require the
maximum amount of tax free cash at this time, but
would like to take a smaller amount of tax free
cash, then it is possible to do this by using a
facility known as Phased Retirement.
'Phased Retirement'
is where the SIPP is typically made up of a 1,000
segements (i.e. mini-policies), providing the member
with the opportunity to open or 'crystalise' any
number of segements and leave other segments
unopened or 'uncrystalised' in order to meet their
requirements.
This facility has the additional
benefit of providing increased tax efficiency as
follows:
- any 'uncrystalised' segments are free from
Inheritance Tax if death occurs before age 75
- ability to defer taking an income until a
time when personal tax rates could be lower
- assuming the funds increase over time,
access to a higher tax free cash amount.
Income
Any income taken from either an
annuity or through Unsecured Pension (USP) is paid
out through PAYE. It is treated by HMRC as 'earned
income' and the provider, whether it be the annuity
provider ot the SIPP provider is required to deduct
tax at source.
The 'Phased Retirement' facility,
as mentioned above, gives the member a degree of
control as to when to take an income in order to
possibly reduce the amount of tax they pay on that
income.
Tax free cash and income post 75
Once a member reaches age 75, any
benefits not already taken need to be 'crystalised'.
That means that any tax free cash still
available will be lost if not taken at that time.
The available options to take an
income would come from either Alternative
Secured Pension (ASP) or via an annuity.
ASP is similar to USP but the maximum and minimum
amounts of income available are calculated under
different terms and conditions. Also, the options
upon death are different. Please see below for more
details about the death benefits available.
The member can continue
working whilst drawing benefits from the SIPP and
can defer taking benefits until reaching age 75.
Death Benefits
What happens is a member dies
before age 75
Uncrystalised Funds
Basically, these are funds
whereby benefits have not yet commenced, i.e. the
scheme member has not yet received a tax-free lump
sum and/or commenced taking a penson.
The value of the member's fund
will be used to provide benefits for a member's
spouse, financial dependants, or other nominated
beneficiaries. The member would usually have
completed an 'Expression of Wish' or 'Death Benefit
Nomination' form which provides the Trustees with
guidance as to where you would like the death
benefits to go, however, they do have absolute
discretion. It is possible for a member to change a
nominated beneficiary at any time.
Death benefits will normally be
paid out in the form of a lump sum, but it is
possible for a pension to be provided for a
nominated spouse and/or financial dependant through
either an unsecured pension (pension fund
withdrawal) or by the purchase of a
lifetime annuity.
NB...Any lump sum payments made
as a result of the death of a member (pre-taking
benefits) are normally free of any Inheritance Tax (IHT) based
upon current legislation, but this cannot be
guaranteed indefinitely.
Crystalised Funds (Unsecured
Pension Funds [USP])
If a member dies whist receiving
an income through unsecured pension, then the
trustees will apply the value of any remaining fund
to provide benefits for a member's spouse, financial
dependants, or other nominated beneficiaries. The
member would usually have completed an 'Expression
of Wish' or 'Death Benefit Nomination' form which
provides the Trustees with guidance as to where you
would like the death benefits to go, however, they
do have absolute discretion. It is possible for a
member to change a nominated beneficiary at any
time.
The value of the member's
crystalised fund can be used to pay benefits in the
following forms:
- a lump sum, after the deduction of a 35% tax
charge, and/or
- used to provide a pension for a nominated
spouse and/or financial dependant through either
an unsecured pension (pension fund withdrawal)
or by the purchase of a lifetime annuity. There
is no 35% tax charge applied of the fund is all
used to provide an income for any
spouse/dependant
Crystalised Funds (Lifetime Annuity)
If death occurs after the purchase of an annuity,
then any benefits payable (if applicable) will be
determined by any guarantee period remaining and/or
spouse's/dependant's pension included at outset.
What happens of a member dies after age 75
Alternatively Secured Pension
(ASP)
If death occurs whist the member
is in Alternatively Secured Pension, then the full
value of the ASP pension fund will be used to
provide benefits for a member's spouse, financial
dependants, or other nominated beneficiaries through
either the pension fund withdrawal facility or
through the purchase of an annuity. Again, the
trustees decide who the pension will be paid to, as
they have total discression, but are guided by the
deceased member's death benefit nomination form (if
completed).
If any member upon death has not
left a surviving spouse or financial dependant, then
the value of any remaining fund can be paid by the
trustees to another family member or beneficiary.
This payment would be classed as an 'unauthorised
payment' and would therefore be subject to very high
tax charges, including Inheritance Tax (IHT). The
trustees will deduct all taxes, including IHT, and
send them onto HMRC before paying out any remaining
funds as death benefits. If any additional tax
charges are due, they would be paid by the
receipient of the remaining funds.
An alternative is to leave the
value of any remaining fund to a nominated charity
(the death benefit nomination form can be used to
nominate the charity). There would be no
'unauthorise dpayment' charge or Inheritance Tax
charge applied on this payment.
Pre-Budget 9 0ctober 2007
The Government announced during
the pre-budget statement on 9 October 2007 that the
IHT provisions for alternatively secured pensions
(ASP) will also be changed. Currently, a charge
arises on left-over ASP funds once a relevant
dependant’s pension benefits cease and the rates of
tax are those applying at the date of that event
rather than as at the date of death of the scheme
member. This rule will be modified so that, if the
IHT nil-rate band was not fully used when the
original ‘owner’ of the ASP died, the same
proportion that was unused will be applied to the
amount of the nil–rate band in force at the date of
the later event and be available against the ASP.
Annuity
If death occurs after the
purchase of an annuity, then any death benefits due
would be determined by any spouse's/financial
dependent's pension entitlements included at outset
along with any guarantee period remaining.
NB...As Alternatively Secured
Pension is a specialist area of financial advice,
then it is important that you speak to us about this
if it is something you are looking to consider as
you near age 75.
Summary
A SIPP is a flexible, tax
efficient way of saving for retirement and taking
benefits at retirement. The facility to hold a
diversed portfolio of different types of assets and
support businesses increases their appeal. However,
because of this they are heavily policed by the
Audit & Pensions Schemes Services of the Inland
Revenue.
This being the case it is
important to take specialist advice prior to making
any investment decisions otherwise the tax exempt
status of the scheme can be withdrawn which will
result in severe tax implications.
At Ashton Hoyle, we can provide you with the
specialist advice you need.
NB...The favourable tax treatment currently
available for SIPPs might not continue in the
future. Whatever your financial advice requirements are,
you can be assured that Ashton Hoyle are well
positioned to provide an innovative answer and we
look forward to speaking to you on any financial
matter. Contact us now
to see how we can help. |
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