A Self-Invested Personal Pension (SIPP) is the name given to the type of UK-government-approved personal pension scheme, which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue & Customs (HMRC).
SIPPs are a type of Personal Pension Plan. Another subset of this type of pension is the Stakeholder Pension Plan. SIPPs, in common with personal pension schemes, are tax "wrappers", allowing tax rebates on contributions in exchange for limits on accessibility. The HMRC rules allow for a greater range of investments to be held than Personal Pension Plans, notably equities and property. Rules for contributions, benefit withdrawal etc are the same as for other personal pension schemes.
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Investors may make choices about what assets are bought, leased or sold, and decide when those assets are acquired or disposed of, subject to the agreement of the SIPP trustees (usually the SIPP provider).
All assets are permitted by HMRC, however some will be subject to tax charges. The assets that are not subject to a tax charge are: [1]
Investments currently permitted by primary legislation but subsequently made subject to heavy tax penalties (and therefore typically not allowed by SIPP providers) include : [1]
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. The Finance Act 2004 implemented wide-ranging changes to the UK pensions regime, most of which came into force on 6 April 2006 (also known as A-Day). The legislation is commonly referred to as pension simplification.[3] SIPPs appear to be gaining in popularity amongst UK investors, with Standard Life reporting a 38% increase during the first half of 2011. [4]
Unlike conventional personal pensions where the provider as trustee 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 co-trustee to exercise control. In practice, most SIPPs do not work this way and simply have the provider as SIPP trustee. Sippdeal launched the first online SIPP in October 2000.
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:
Contributions to SIPPs are treated identically to contributions to personal pensions. Contributions are limited to £3600 (£2880 before 20% tax refund) or 100% of earned income (if higher). The maximum was £235,000 for the 2008/09 tax year but the 'Annual Allowance' for all pension contributions is £50,000 (tax year 2011/12). The SIPP provider claims a Tax refund at the standard rate (20% as of 2009) on behalf of the customer (i.e. you pay £2880 and your fund contribution for the year will become £3600). The 20% is added to the 'pot' some 2–6 weeks after your payment is made. Higher-rate Tax Payers must claim any additional Tax refund through their tax return. Employer contributions are allowable against corporation or income tax.
Income from assets within the scheme is untaxed (although it is not possible to reclaim Dividend Tax). Growth is free from capital gains tax (CGT).
At any time after the SIPP holder reaches early retirement age (55 from Apr 2010) they may elect to take a Pension from some or all of their fund. After taking up to 25% (as of 2010) as Tax free Pension Commencement 'lump sum' the remaining money must be moved into DrawDown (and continue to be invested) or an Annuity purchased. Drawdown income is limited (by the provider) to approx 7% of the drawdown fund value (this is reviewed every 5 years). Income taken from DrawDown or an Annuity is taxed 'as if' earned income at the members highest marginal rate.
Rules exist to prevent the Pension Commencement 'lump sum' being 'recycled' back into the SIPP (and neither drawdown nor annuity payments count as 'earned income' for the purpose of making SIPP contributions).
If the fund value exceeds the 'Lifetime Allowance' of £1.8 million (tax years 2010/11 and 2011/12) at retirement, then the amount above £1.8 million will be taxed at 55%. From April 2012 the 'Lifetime Allowance' will fall to £1.5 million but there will be provisions for those previously relying on the higher limit.
SIPPs can borrow up to 50% of the net value of the pension fund to invest in any assets, although in practice SIPP trustees are only likely to permit this for commercial property purchase.