SIPPs Guide
The Self Invested Personal Pension
So what is a SIPP?
How does a SIPP work?
What investments can I hold within a SIPP? Who are they for? ‘A-Day’ - 6th April 2006 |
The Self Invested Personal Pension |
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In a previous article,
we gave an overview of the different types of pension available under
the current legislation and the implications of the new rules that come
into force on ‘A-Day’, April 2006. This article is going to concentrate
on Self Invested Personal Pensions, SIPPs, and how they will be
affected by A-Day.
A SIPP is a personal pension designed principally, but not always, to provide a retirement income for the individual – in the same way as any other pension.
SIPPs were first introduced by the Conservative government in 1989, as a means of offering increased pensions flexibility to an increasingly flexible workforce. The principle difference was that a SIPP allowed you to manage your own investments, ranging from shares and bonds to mutual funds, foreign shares, property and government stocks - or to choose your own team of investment managers.
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How does a SIPP work? |
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Traditionally, personal pensions have given you very limited options on how to invest your pot of pension monies - you were allowed to select the company that managed your pension and given a range of different investment funds to choose from, dependent upon your risk profile. And that was it.
SIPPS offer far more flexibility. Each SIPP is set up as an individual account – similar to a bank account. You choose which company to hold your account with, dependent upon the different investment options and fee structures available. Your pension’s savings are then paid into your individual SIPP account, where they will accumulate until such time as you use them to buy whatever investments best suit your savings objectives.
The cost of a SIPP account varies depending upon the provider, but typically includes a one-off set-up fee, an annual management charge and transaction costs dependent upon what you buy and sell within the fund.
The true value of the SIPP comes from the range of investments that you can hold within your account and the control that you have over the decision-making and the timing. You can invest in any of the following through your SIPP account:
- Stocks and shares quoted on the UK Stock Exchange
- Stocks and shares traded on a recognised overseas stock exchange
- Futures and options traded through a recognised exchange
- Deposit accounts, held in any currency, with any authorised financial institution
- Investment funds, including open-ended investment companies (OEICs), unit trusts, investment trusts and recognised offshore funds
- Insurance company managed funds and unit-linked funds
- Traded endowment policies through a recognised dealer
- Commercial property, including land, purchased outright with your pension’s funds or using a mortgage of 75% the purchase-price of the property
- Ground rents
- Government stocks and bonds, and those issued by foreign governments
- Debentures and loan stock
It is also worth noting that there are some types of asset that are specifically excluded from the list of allowable SIPP investments:
- Unquoted/ private company shares, including those listed on OFEX
- Residential property
- Commodities (e.g. gold bullion, coffee beans or oil)
- Art
- Offshore insurance company products
- Any asset belonging to someone ‘connected’ to the SIPP holder, i.e. you cannot buy or sell any assets to or from your direct family
In theory, SIPPs are for anyone under the age of 75, although they are best suited for the self-employed and those not already in an occupational pension scheme. The amount that you are allowed to pay into your pension fund each year is tied to your age and income, as below, although these limits are set to change in the pensions shake-up from A-Day next year.
Whilst in theory you could probably invest as little as £25 a month into a SIPP, the SIPP providers generally have their own minimum limits & fees and you would probably need to invest considerably more for a SIPP to make economic sense. SIPP investment can be more useful for:
- Individuals with several occupational pensions from previous jobs, looking to consolidate their funds into a single manageable pot,
- High net worth investors looking to consolidate their investments
- Financially astute individuals confident and willing to manage their own investment portfolio
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‘A-Day’ - 6th April 2006 |
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Alternative pension investments
You will be able to use your pension fund to buy (and keep hold of) a much wider range of assets, which could include residential property, art, antiques or holiday homes – this will include property purchased outright with your pension fund or partly funded with a mortgage of up to 50% of the net value of your pension fund.
New allowances
After A-Day, contributions into a pension scheme will be subject to new allowances that will allow you to make greater contributions to your pension fund each year. The ‘annual allowance’ will be £215,000 in 2006/07, or 100% of earnings, whichever is the less. Whilst the new lifetime limit will initially be set at £1.5 million.
Greater flexibility
Under the current legislation, you are not allowed to contribute to a SIPP if you are already a member of an occupational pension scheme. (Although in certain circumstances, you can invest up to £3,600 a year, provided you are not a controlling director of the firm that employs you and don’t earn more than £30,000 a year).
Under the new post A-Day legislation, you will have the ability to take out a SIPP in addition to any other arrangements you might have, thus giving you greater retirement provision and allowing you to take more advantage of the new annual & lifetime allowances.
Age when benefits can be taken
Under the current legislation, the earliest you can take benefits is at 50 (although some categories of sports people and entertainers can retire earlier). The new legislation dictates that the minimum age at which you can take benefits will rise to 55 after 6th April 2010.
All of which suggests that it may be worth your while taking professional advice before proceeding with your SIPP investment.
