A Self-Invested Personal Pension Scheme (SIPP) provides you with the option of choosing when, where and how you invest the assets of your pension fund. Any contributions that you make to a SIPP will receive tax relief of between 20 per cent and 40 per cent depending on what the current tax rates are and what personal tax band you are in.
SIPPs have been around since 1989, but after the introduction of Pension Simplification legislation on 6 April 2006, SIPPs have become more accessible.
With a SIPP you are free to invest in:
– Cash and Deposit accounts (in any currency providing they are with a UK deposit taker)
– Insurances company funds
– UK Gilts
– UK Shares (including shares listed on the Alternative Investment Market)
– US and European Shares (stocks and shares quoted on a Recognised Stock Exchange)
– Unquoted shares
– Permanent Interest Bearing Shares
– Commercial property
– Ground rents in respect of commercial property
– Unit trusts
– Open ended investment companies (OEIC)
– Investment trusts
– Traded endowment policies
– Futures and Options
Once invested in your pension the funds will grow free of UK Capital Gains Tax and Income Tax (tax deducted from dividends cannot be reclaimed).
The most important thing to remember is that the range of available investments depends largely on the choice of SIPP provider, which means obtaining professional financial advice is important before taking any action. Ultimately it is down to the trustees of your pension plan to agree whether they are happy to accept your investment choices into the SIPP. The trustees are responsible and liable for ensuring that the investment choices fall within their remit.
There are significant tax benefits. The government contributes 20 per cent of every gross contribution you pay; meaning a £1,000 investment in your SIPP costs you just £800. If you’re a higher rate tax payer, the tax benefits could be even greater.
When you wish to withdraw the funds from your SIPP, between the ages of 55 and 75 (50 and 75 before 6 April 2010), you can normally take up to 25 per cent of your fund as a tax-free lump sum. The remainder is then used to provide you with a taxable income.
If you die before you begin taking the benefits from your pension the funds will normally be passed to your spouse or other elected beneficiary free of Inheritance Tax. Other tax charges may apply depending on the circumstances.
A SIPP can also be used to invest and develop commercial property, such as offices, industrial units or shops. Your pension fund does not even have to be large enough to buy a property outright as you may be able to borrow up to 50 per cent of the fund’s net value.
There are also tax advantages of buying your own business premises within a SIPP. The rent paid into your SIPP is free of tax because it is a tax deductible expense. There will be no Capital Gains Tax to pay on the property when it is sold within the pension fund and if you die before age 75 and before you start drawing your pension, your beneficiaries can receive the proceeds of the sale of the property free of Inheritance Tax.