Ashton Hoyle Trustees Limited

The Ashton Hoyle SIPP

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 £235,000 for 2008/9 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.

Protected Rights - At last, Investment choice for your pension

Over 6 million people have contracted out of the State Earnings Related Pension Scheme (SERPS) and 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 those investors willing to take their own investment decisions the chance to invest the proceeds into a SIPP (provided the SIPP has received a contracting-out certificate).

Until now, a limitation within pension regulations has resulted in this type of pension money (often referred to as protected rights) having to be held within traditional insurance company pension arrangements. Over recent years, many of these arrangements have performed poorly and offered investors a limited range of investment funds in which to invest in....until now!

Transferring protected rights funds into a SIPP gives an investor the opportunity to breathe new life into these often forgotten and neglected pension funds. By utilising a variety of different investment options (as outlined below), many investors can now look to benefit from a new and more bespoke investment strategy including the purchase of commercial land and/or commercial property.

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 debantures
• 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 indivdual's pension savings (under all registered pension schemes) exceeds the 'Lifetime Allowance' (£1.65m for tax year 2008/9), then there will be an additional tax charge (known as the lifetime allowance charge) on any excess over the £1.65m.

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 depenedant'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.

About Ashton Hoyle Trustees Limited

The Personal Touch created!

The Ashton Hoyle SIPP offers you (or your clients) the freedom & flexibility to do more. We offer bespoke solutions, and abide by the over-riding principle that "If Revenue and Customs will allow it we will find a way to make it happen".

Ashton Hoyle Tustees Limited seek to provide administration and technical support to the highest standard for our clients and feel that we achieve this through a unique blend of flexible, personal and friendly service delivered to our clients at a clearly understandable level.Ashton Hoyle Trustees Limited don’t believe in call centres. Every member of our team is equally contactable and all are helpful, knowledgeable and friendly which is why we’re proud to claim ‘expertise and accessibility combined’.

Total flexibility created!

We believe in freedom of choice and do not attempt to limit our clients' choice of investments like many other SIPP providers do. ‘If Revenue and Customs will allow it we will find a way to make it happen’.

Total control created!

We believe that you choose a SIPP because you want to take control of your retirement plan, and thus choose a SIPP provider who won’t take that control away from you. With the Ashton Hoyle SIPP, you can choose your own investment strategy (with guidance and advice from your IFA), you own your assets and you are a signatory on all transactions.

Clarity created!

We pride ourselves on our ability to clearly and understandably guide both our introducers and our end clients through the immense possibilities provided by self invested pensions. We take a complicated subject and make it simple.

How do I create a SIPP?

Click here to download an application for this pension arrangement. Please forward the completed form on to us.

What are the minimum and maximum contributions for a SIPP?

Contributions can be paid into the scheme by the member (or another person on behalf of the member) or an employer. There is no limit on the amount of member contributions that may be paid into the SIPP but there is a limit on the amount of tax relief a member may receive on contributions paid by, or on behalf of the member.

Tax relievable member contributions are restricted to 100% of the individual’s relevant UK earnings (up to the annual allowance of £235,000 [2008/9] or £3,600.

There is no set limit on the amount of tax relief that an employer may receive in respect of any contribution paid into the SIPP (provided the contribution is classed as an allowable expense by the local inspector of taxes), but tax relief is not automatic.

Can existing pension arrangements be received by a SIPP?

A SIPP can receive transfers from most other pension arrangements that a member may hold, although we would recommend that financial advice be taken prior to any action.

Retirement

The flexibility upon retirement is a huge appeal of a SIPP product. Retirement can be deferred to age 75 years and the member can continue to work once in receipt of these benefits. Under the current rules a member can take their benefits from the age of 50 years (age 55 from 6 April 2010). A tax-free lump sum can be drawn from the fund upon retirement equal to 25% of the fund value.

The member has 3 choices on retirement:

• The purchase of an Annuity.
• Unsecured pension (USP), or Alternative Secured Pension (ASP) post age 75 years.
• Phased Retirement utilising annuity purchase, USP or a combination of both.

NB... With an annuity, the member buys a guaranteed income for life with a life office.

Unsecured Pension (USP)

The member takes his pension directly from the fund. It is calculated by using the annuity rate figures published by the government’s actuarial department (GAD). The member can choose to take the Inland Revenue maximums or any level of pension between nil and the maximum figure.

With Phased Retirement, the fund is split into 1,000 segments giving added flexibility on the timing and amount of income taken which can be in the form of a secured or unsecured pension.

Death Benefits

The fund (whilst uncrystallised) can be paid to a nominated beneficiary on death and is usually free from inheritance tax (before age 75). In the event of death the fund is distributed either to provide a spouse's/ dependents' pension or as a lump sum payment. Where benefits have been taken (i.e., crystallised), there are variations on how the fund can be used, either to provide ongoing income to any spouse/financial dependant or as a lump sum. (For a more detailed assessment of death benefits, please refer to section above).

What are Permissible Investments in a SIPP?

The Trustees are responsible for implementing an investment strategy although the assistance of a professional advisor is usually required/recommended. The majority of investments held within a SIPP are predominantly free from income, corporation and capital gains tax.

The following are permissible investments in a Ashton Hoyle SIPP;

• Cash Deposits.
• Authorised Unit Trusts, OEICs & AIMs.
• Trustee Investment Plans.
• Stocks & Shares quoted on the Stock Exchange.
• Gilts or other Loan Stocks.
• Futures & Options.
• Second Hand Endowment Policies.
• Commercial Property & Land.
• Borrowings.
• Unquoted shares.

NB. The Ashton Hoyle SIPP does not permit investment in residential property, however we have found the following exceptions to the residential rules (certain parameters apply, please call for more information);

• Certain Student Accommodations.
• Hotels, B & B, Youth Hostel.
• Hotel Room.
• Disabled Residencies.
• Nursing Homes.
• Golf Courses.
• Farms.
• Development Land.
• Shop with a connecting flat (although the flat cannot ultimately be owned by SIPP).

Commercial Property & Land included in a SIPP

One of the most popular features of a SIPP is the ability to purchase commercial property with the assistance of borrowings. The trustees can borrow an Inland Revenue maximum of up to 50% of the 'net asset value' of the SIPP fund.

The property can be purchased from either a connected party including themselves or from a completely independent third party. The SIPP can also purchase a property jointly with other individuals or other entities. The property can be leased to the member’s own company (on commercial terms) or indeed a third party.

Other Considerations.

• The SIPP can register for VAT.
• More information on purchasing a property within the pension scheme can be downloaded here.
• Certain information will be required to proceed with a property purchase. Please complete the questionnaire with as much information as possible and forward to us.

Is any other self investment permissible?

Yes. The Trustees can invest in shares of the members own company, however, must acquire a valuation of the shares from the company accountant/auditor is required in the first instance to establish if it will work.

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. To find out more, please contact us here.

NB...The favourable tax treatment currently available for SIPPs might not continue in the future.