SIPPs
A tailor-made retirement solution to suit your needs

Self-invested personal pensions (SIPPs) are increasing in popularity, with many investors being attracted by their sophistication and tailor-made investment offerings combining both choice and control. A SIPP can be used to hold a wide range of investments, from shares, gilts, unit trusts and investment trusts to insurance company funds and commercial property.

Investing in commercial property can be particularly attractive for small business people, who may wish to buy premises through their pension fund. There are considerable tax advantages in using the fund to buy commercial property. Ordinarily, a business property will, assuming that its value increases, generate a tax liability for the shareholders or partners. Unless, that is, you sell the property to your SIPP. The rental income is received tax-free by the fund and when the property is sold, which must be before the pension is drawn, there is no capital gains tax payable.

Someone with their own business could use the property assets, such as offices, factories, agricultural land and warehouses, as part of a tax-efficient retirement nest egg. In this case, they would pay rent directly into their own pension fund rather than to a third party.

SIPPs – Your questions answered

Q: What is a SIPP?
A: A SIPP is a self-invested personal pension. It gives you complete control over your pension savings and where they are invested. SIPPs are sometimes also referred to as wrappers, because they can hold a range of pension investments tax-free, including cash. Despite their name, you don't have to select the investments yourself – you can appoint a professional to do it for you.

Q: Where can I invest my money?
A: You can select from a wide range of assets, including stocks and shares, government securities, unit and investment trusts, insurance company funds, traded endowment policies, deposit accounts with banks and building societies, National Savings products and commercial property.

Q: Who is eligible for a SIPP?
A: Every UK resident under the age of 75 could contribute to a SIPP. You can open one for a child without it affecting your own tax status.

Q: How much money can I invest?
A: Due to the tax concessions within pensions, HM Revenue & Customs restrict the maximum annual amount on which you can receive tax relief. This is the greater of £3,600 p.a. or 100 per cent of your UK Relevant Earnings (subject to a maximum of the ‘Annual Allowance’). There are no specific limits on tax relief on employer contributions, but if your personal and your employer’s contributions exceed the ‘Annual Allowance’, you will be taxed on the excess. The ‘Annual Allowance’ is currently £225,000 in 2007/08.

Q: What tax relief can I receive?
A: Employee contributions are made net of tax. So a net contribution of £780 would receive tax relief of £220 – equivalent to basic rate tax at 22 per cent. Higher rate taxpayers can claim a further 18 per cent tax relief via their tax return. This means, for a higher-rate taxpayer, a £1,000 contribution would cost just £600.

Q: When can I take benefits?
A: You can take benefits at any time after age 50 (55 for those retiring from 6 April 2010). Benefits can be taken in stages. You can only draw benefits before age 50 (55 from 6 April 2010) due to illness or accident which leaves you unable to work. If you defer starting to take benefits until after you are age 75 you will lose the option of taking a tax-free lump. At age 50 (but not later than 74) you can take up to 25 per cent of the value of your benefits as a tax-free lump sum provided there is provision in the scheme rules, to an overall maximum of 25 per cent of the ‘Lifetime Allowance’. The remainder would be used to provide an income, which is subject to tax. You could do this via an annuity, or leave the fund invested and take income from it – this is known as income drawdown. You do not need to retire from work to take benefits.

Q: Can I invest in residential property?
A: No. This was outlawed by the then Chancellor, Gordon Brown, in his December 2005 Pre-Budget Report. You can, however, invest in property funds.

If you require any further information about the services that we provide or would like to review your financial planning position, please email or contact us.

Levels and bases of, and reliefs from, taxation are subject to change.
Article date: 08.07