Otherwise known as Self Invested Personal Pensions there are a large number of investment opportunities. A SIPP is a type of pension for people comfortable making their own investment decisions about their retirement. Like a personal pension, savers enjoy tax relief, and can also hold a range of assets, from shares to unit trusts.
What are Self-Invested Personal Pensions (SIPPS)?
SIPPS are self-invested personal pensions which provide you as the investor the ability to take control of your pension reducing the overall cost and providing enhanced flexibility compared to standard personal pensions in the UK.
SIPPS have actually existed in the UK for almost quarter of a century, however in 2006 as the government made pensions less complex it became easier for investors to choose their own retirement plans. SIPPS actually work in the same way as other personal or stakeholder pensions with regards to taxation, contribution limits and retirement options, however the significant advantages to the investor is that SIPPS are considerably cheaper and provide access to a far superior choice of investments.
It`s fact SIPPS are more cost efficient and provide a greater choice of investments means that investors can potentially build a retirement plan that comfortably provides for their retirement.
What a SIPPS provides you as the investor?
As previously stated a SIPPS gives you complete control over your pension savings, where your money is invested and how much everything costs. After the regulations were amended in 2006 it is now possible to benefit from full tax relief based on annual incomes of up to £130,000, and a basic rate tax relief up to £235,000 after that.
If you were to become unemployed, or once you have retired you can continue to contribute into your SIPP up to a level of £3,600 each year and basic tax relief is still applied even if no tax is paid.
Access to your pension is possible from the age of 55, and there is no requirement for you to take an annuity until the age of 77. If no annuity has been taken you will also be able to pass your funds to your family upon your death.
All of your existing pension entitlements can be passed into your SIPP including occupational pension schemes. Access to a far greater choice of investments in you SIPP allows you to then build a secure fund to provision for retirement.
What can you invest into?
Possible the biggest advantage to the investor of a SIPP is the greater choice and flexibility with regard to investments. Via your SIPP you have access to the following:
• Cash and deposit
• Property – up to 50% of your SIPP can be used for commercial property purchases. Property purchase become an asset of your pension and can be used to provide you with retirement benefits and income.
• Stocks and shares including UK gilts, bonds, futures and options, permanent interest bearing shares, equities and other fixed interest securities.
• Collective investment funds including unit trusts, investment trusts, open ended investment companies (OEICS), and insurance managed funds.
• Traded Endowment Plans
Unlike normal pensions your SIPP will allow you to exit poorly performing investments allowing for greater returns to be achieved. This flexibility allows the investor to manage his investment strategy whilst receiving tax relief.
The tax advantages of a SIPP to the investor
The first point to note is SIPPS have exactly the same tax benefits as all other personal pensions.
If you are a basic rate tax payer you will benefit from automatic tax relief meaning for every 80p contributed to your pension the government will add a further 20p making the gross contribution £1. Your SIPP provider will collect the tax relief on your behalf and automatically add this to your pension fund.
For higher rate tax payers the benefit is enhanced and for every 60p you contribute and further 40p is added by the government to make £1. These government contributions apply to anyone residing in the UK under the age of 77.
Once you retire you are entitled to take 25% of your SIPP fund as a tax free lump sum amount and the remaining 75% is left in your SIPP to provide your pension income.
If no annuity has been taken, the fund can also be made available to your beneficiaries free of inheritance tax, a potential 40% tax saving. In addition you can also benefit from income drawdown whereby you can avoid the requirement to purchase an annuity until you reach the age of 77.
A further advantage is the option for staggered or phased retirement. Should you retire early this happens regardless of whether you are still working or not. You have the flexibility to choose your investments.
Investors are now able to save as much as they wish into pensions including stakeholder pensions. Tax relief is provided up to 100% of your annual income up to £255,000 for the 2010 -2011 tax year.
What that means is for every £80 you add to your pension you end up with £100. As a higher rate tax payer you are entitled to enhanced tax relief, therefore, for every £80 you contribute to your pension you end up with £120. Any contributions above the annual allowance are subject to tax.