Self-Invested Personal Pensions

Following the introduction of Pension Simplification legislation in 2006, Self-Invested Personal Pension Plans (SIPPs) have become more accessible to more sophisticated investors who require greater control over their pension planning and want greater access to different investment markets. They also offer excellent tax planning solutions, and in these current difficult financial markets provide for the appropriate investor with the maximum amount of flexibility when planning for retirement.

SIPPs are wrappers that provide individuals with more freedom of choice than other conventional personal pensions. They allow investors to choose their own investments or appoint an investment manager to look after their portfolio.

As a SIPP investor you have the option of choosing when, where and how you invest the assets of your pension fund. Contributions that you make to your SIPP will currently receive tax relief of between 20 per cent and 40 per cent, depending on which personal tax band you are in.

You have to appoint a trustee to oversee the operation of your SIPP, but having done this you can then effectively run your pension fund according to your investment requirements.

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. A fully fledged SIPP can accommodate a wide range of investments under its umbrella. However, you are likely to pay for the wider level of choice with higher charges.

At its most basic, a SIPP can contain straightforward investments such as cash savings or government bonds. You can also include unit and investment trust funds, and other more esoteric investments such as commercial properties and direct share investment. Other options are derivatives, traded endowment policies and shares in unquoted companies. So investments held within your SIPP wrapper can range from low to high risk, but crucially cannot include a second home or other residential property.

If you are considering transferring your existing pension money into a SIPP, there are a number of important considerations you should discuss with us first. These will include the potential charges involved, the length of time you have to retirement, your investment objectives and strategy, your existing pension plan guarantees and options (if applicable) and the effects on your money if you are transferring from with-profits funds.

If you are an expatriate living overseas or hoping to move overseas in the very near future, then it may also be worth considering a Qualifying Recognised Overseas Pension Scheme (QROPS). A QROPS is a pension scheme set up outside the UK that is regulated as a pension scheme in the country in which it was established, and it must be recognised for tax purposes (i.e. benefits in payment must be subject to taxation). The procedure for overseas transfers has been simplified significantly since April 2006. Now, as long as the overseas scheme is recognised by HM Revenue & Customs as an approved arrangement, the transfer can be processed in the same way as a transfer to a UK scheme.

There is in fact no financial limit on the amount that you can contribute to your SIPP, although there is a maximum amount on which you will be able to claim tax relief in any one tax year and a lifetime allowance restricting the total fund size. Under the rules which came into force from April 2006, investors now have much more freedom to invest money in their SIPP.

You can make contributions of up to 100 per cent of your net relevant earnings and receive full tax relief on the total, subject to a maximum earnings limit of £245,000 in 2009/10. If you were to invest more than your earnings but within the annual allowance you would not receive any additional tax relief. Where the total pension input amount exceeds the annual allowance a tax charge of 40 per cent of the amount in excess of the limit will be levied.

Contributions can be made by employers, employees and the self-employed. Where previously employees in a company pension scheme who earned more than £30,000 were not permitted also to contribute to a SIPP, they are now free to do so, provided that they do not exceed the limit of 100 per cent of their earnings, up to
the maximum earnings limit.

Alternatively, an employer can also make an annual contribution of up to £245,000 in 2009/10 on behalf of an employee regardless of their remuneration. There are charges associated with SIPPs, these include, the set-up fee and the annual administration fee. A low-cost SIPP with a limited range of options, such as shares, funds and cash, might not charge a set-up fee and only a modest, if any, annual fee.

A full SIPP will usually charge a set-up fee and then an annual fee. The charges are usually a flat rate, so they benefit investors with larger pension pots. There will, in addition to annual charges, be transaction charges on matters such as dealing in shares and switching investments around.

If appropriate, you are also permitted to consolidate several different pensions under the one SIPP wrapper by transferring a series of separate schemes into your SIPP. However, it is important to ascertain if there are any valuable benefits in your existing schemes that would be lost on such a transfer. The actual transfer costs also have to be taken into consideration, if applicable. SIPPS are not appropriate for everybody and there are alternative methods of saving for retirement. Transferring your pension will not guarantee greater benefits in retirement.