Self Invested Personal Pension

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.

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 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.