Self-Invested
Personal Pensions

Your questions answered

It’s not something we usually contemplate during our working lives, but many of us could spend almost a third of our life in retirement. Even if your retirement isn’t on the near horizon it’s never too early to start planning. A pension is one of the most effective ways to save for your future because of the tax benefits they offer.

Changes to the pension rules in April 2006 (known as ‘A-Day’) enabled individuals to invest higher contribution levels and made it easier to set up a Self-Invested Personal Pension (SIPP), a tax-efficient wrapper into which you can put a range of investments chosen by you to achieve your future personal financial goals.

SIPPs are personal pensions which allow more sophisticated investors to choose where you want your retirement savings to be invested, instead of leaving a pension company to make the decisions. You can hold a wide variety of investments in a SIPP, from investment funds and shares to commercial property and futures and options.

When you reach retirement, you can take an income direct from your pension fund, in the form of a so-called ‘unsecured pension,’ which may give you greater control over how and when you take income from your fund.

SIPPs share the same benefits as personal and stakeholder pensions. They enjoy tax relief at either basic or higher rate tax, your contributions will accumulate and from the age of 50 (or 55 after 2010) you can claim a tax-free lump sum and income from your SIPP. The tax treatment will depend on your individual circumstances and may be subject to change in the future.

Q: Who can take out a SIPP?
A: You can take out a SIPP even if you are already contributing to another pension, such as an occupational (company) pension scheme, providing you don’t exceed the maximum pension contribution limits. But it is important to be sure that you are really going to make use of the investment freedom a SIPP offers and that it makes financial sense for you to do so as some SIPPs could be more expensive than other types of pensions.

Q: How much can I contribute to a SIPP?
A: It is generally recommended that you should have an existing pension fund of around £50,000 to transfer or invest lump sums of several thousand pounds a year.
Since April 2006, the maximum amount that you can contribute to your pension each year and qualify for tax relief is the equivalent of 100 per cent of your taxable earnings (called net relevant earnings), subject to an annual limit of £245,000 and an overall lifetime limit for your pension pot of £1.75m. (These are the limits for the tax year 2009/10 and will be increased in future tax years).

A reason why people may wish to consider transferring their previous pension policies into a SIPP is to consolidate their retirement savings in one place and thereby benefiting from easier administration and the possibility of more cost-effective charges.

Q: What investments can I include in a SIPP?
A: These are the main investments permitted, that can be included in a SIPP:

• Deposit accounts (in any currency providing they are with a UK deposit taker)
  
• Government securities and other fixed interest stocks
  
• Unit trusts
  
• Open ended investment companies (OEICs)
  
• Investment trusts
  
• Insurance funds
  
• UK stocks and shares including shares listed on the Alternative Investment Market (AIM)
  
• Overseas stocks and shares quoted on a Recognised Stock Exchange
  
• Unquoted shares
  
• Commercial property
  
• Ground rents in respect of commercial property
  
• Traded endowment policies
  
• Permanent Interest Bearing Shares (PIBS)
  
• Warrants
  
• Futures and Options

Q: How much could I expect to receive from a SIPP?
A: The amount of pension you receive at retirement from a SIPP will depend on how much you invest, the growth of your investments, how much is deducted in charges and annuity rates (if you decide to convert your fund into an annuity at age 75).

SIPPs offer a wider range of investment options compared with personal and stakeholder pensions. You receive income tax relief on your contributions and the investments in your SIPP grow virtually tax-free. You can take a tax-free lump sum, plus an income from your SIPP between the ages of 50 and 75, although from 2010 the minimum age at which you can take retirement benefits increases to 55.

Q: How can I invest in property via a SIPP?
A: One of the attractions of SIPPs is that they can be used to invest and develop commercial property, such as offices, industrial units or shops. Your pension fund does not even have to be large enough to buy a property outright as you can borrow up to 50 per cent of the fund’s net value. It is not possible to invest directly in residential property via a SIPP, although a commercial property with a residential element such as a caretaker’s flat may be permitted.

By far the greatest demand for property investment within a SIPP is from small business people who want to buy their own business premises. Changes to the pension rules in April 2006 mean such purchases are now possible even if the property is already owned by the investor or someone connected to them.

Buying your own business premises within a SIPP can have several tax advantages. The rent paid into your SIPP is free of tax because it is a tax deductible expense. There will be no capital gains tax to pay on the property when it is sold within the pension fund and if you die before age 75 and before you start drawing your pension, your beneficiaries can receive the proceeds of the sale of the property free of inheritance tax.

Q: How do I move my existing pensions into a SIPP?
A: If you contact your chosen SIPP provider and give them details of your previous pensions, they will arrange for the transfer of your funds into your SIPP. However, it is vital to take professional advice first.

Your previous pensions may also include guaranteed annuity rates which could give you a higher pension than would be available if you were to switch, or there may be a large penalty for transferring.

If you are considering switching from an occupational scheme, you may also be at risk giving up some valuable benefits such as spouse’s and dependants’ pensions as well as ill health and early retirement benefits.

If part of your pension has been built up from National Insurance rebates as a result of being opted out of the State Earnings Related Pension Scheme (SERPs) or the State Second Pension (S2P), these funds cannot currently be transferred into a SIPP but must be invested into an insurance plan.

Q: What are the alternatives to a SIPP?
A: If your main concern is to be able to spread your pension savings among a variety of different investment groups rather than being tied to one set of funds offered by your pension company, a cheaper solution than a SIPP could be an ordinary personal pension where you are offered a wide choice of external managers.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.