Self-invested personal pension

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A Self-Invested Personal Pension (SIPP) is an arrangement within a UK personal pension scheme in which the scheme member has the power to direct how the contributions are invested. (Source: HMRC)

The main reason to choose a SIPP above a conventional personal pension is to exercise power over the type and range of investments bought; especially having the power to purchase commercial property either directly or with a mortgage.

SIPPs must be arranged for the sole purpose of providing an annuity, income withdrawal or cash lump sums on retirement of the member. In common with personal pensions, retirement can (ordinarily) occur between age 50 and 75. Tax rules require 75% of the pension fund must be used either to purchase an annuity or to provide income withdrawal. The remaining 25% of the fund can be taken as a tax-free lump sum. If income withdrawal has been used for income, then at age 75 the remaining fund must be used to purchase an annuity.

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[edit] Investment choice

Members may make choices about what assets are bought, leased or sold, and decide when those assets are acquired or disposed of. The range of assets include:

  • Stocks and shares listed on a recognised exchange
  • Futures and options traded on recognised futures exchange
  • Authorised UK unit trusts and OEICs and other UCITS funds
  • Unauthorised unit trusts that don't invest in residential property
  • Investment trusts subject to FSA regulation
  • Unitised insurance funds from EU insurers and IPAs
  • Deposits and deposit interests
  • Commercial property (including borrowing to fund the purchase)
  • Ground rents
  • Traded endowments policies

(Source: HMRC IR76 Personal Pension Scheme Guidance Notes)

Coming into force August 2006 under Exception of Tangible Moveable Property

  • Gold bullion
  • Any item of tangible moveable property (whose market value does not exceed £6,000) - subject to further conditions on use of property

[edit] History

The rules and conditions for a broader range of investments were originally set out in Joint Office Memorandum 101 issued by the Inland Revenue in 1989. Today the rules have been incorporated into The Personal Pension Schemes (Restriction on Discretion to Approve)(Permitted Investments) Regulations 2001 (SI 2001/117) which came into force with effect from 6 April 2001.

(Source: HMRC Pensions Update 123 2002)

As of July 2006, the new UK Finance Act 2006 has included gold bullion as a valid SIPP investment, following lobbying by BullionVault.

[edit] Structure

Unlike personal pensions, where the scheme trustee or administrator has ownership and control of the assets, in a SIPP the member may have ownership of the assets (via an individual trust) as long as the scheme administrator is a trustee to exercise control.

The role of the scheme administrator in this situation is to control what is happening and to ensure that the requirements for tax approval continue to be met.

The pensions industry has gravitated towards three industry terms to describe generic SIPP types:

1. Deferred. This is a type of scheme in which most or all of the pension assets are held in insured funds (investment vehicles provided by large insurance companies). The deferral of self-investment or income withdrawal activity until a later date gives rise to the name. Most scheme members are usually under the age at which income may be withdrawn.

2. Hybrid. A scheme in which the assets and activities are held in mixed vehicles, based on an insured element. Some assets may be held in insured investment products, some assets and investments will be directed by the member themselves ('self-invested').

3. Pure. Pure SIPP schemes offer unrestricted access to all allowable investment asset classes and are usually more expensive to operate and own. These types of schemes are usually offered by small 'boutique' scheme administrators and often appeal to the more affluent segment of the retirement marketplace. Without an insured element, these schemes offer greater opportunity for the member to direct the investment activity themselves.

[edit] Tax treatment

Contributions to SIPPs are treated identically to contributions to personal pensions. Individual contribution will receive automatic basic-rate tax-relief; higher-rate taxpayers can claim additional relief through their tax returns. Employer contributions are allowable against corporation or income tax.

Income from assets in the scheme will remain untaxed; although in common with other pensions the tax credit for UK income is no longer reclaimable. Growth is free from capital gains tax.

Pension income provided either from an annuity or via income withdrawal is taxed as earned income at the members highest marginal rate.

[edit] Changes after A-day

From April 6th 2006, you will be able to invest up to 100% of your income within a SIPP Pension fund. The upper limit of the amount that you can invest is £215,000 and the maximum amount that can be invested within the fund is £1.5 million. If the fund value exceeds £1.5 million then the excess will be taxed at 55%.

Until Gordon Brown's Pre-Budget Report on 5th December 2005 the proposed tax regime changes were set to allow direct investment in residential property and other exotic assets like vintage cars, wine, stamps and art. However in a dramatic U-turn it was announced that the rules will be changed so as to impose additional taxes that will make the direct holding of these assets unattractive.

Investors may still invest in residential property via a Real Estate Investment Trust when launched in the UK. A REIT is a Collective investment scheme designed to invest in residential property. The stated reason for forbidding direct investment in property was to avoid tax privileged investments being enjoyed through personal use, e.g. investing in a holiday home for personal use.

SIPPs will be able to borrow up to 50% of the net value of the pension fund to invest in any assets (including residential property funds). In addition, SIPP members may also delay the requirement to buy an annuity after age 75, using an 'Alternative Secured Pension' (a type of unsecured income withdrawal) - keeping the bulk of their assets invested.

Final rules are yet to be published and some of the practical implications have yet to be ironed out by providers before there is certainty as to the full implications of these important changes.

[edit] See also

[edit] External links

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