What is a SIPP?

 A SIPP is a Self Invested Personal Pension Scheme that 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% ,40% and 50% 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 in 2006, they have become more accessible to the mass market. Until recently, SIPPs have not fallen within the regulation of the Financial services Authority (FSA) but this has now changed. Consequently more investors are feeling comfortable with taking control of their pension planning.

 Investors may make choices about what assets are bought, leased or sold, and decide when those assets are acquired or disposed of, subject to the agreement of the SIPP trustees (usually the SIPP provider).

All assets are permitted by HMRC, however some will be subject to tax charges. The assets not subject to a tax charge include:

·       Stocks and shares listed on a recognised exchange

·       Futures and options traded on recognised futures exchange

·       Authorised UK unit trusts and OEICs and other UCITS funds

·       Unauthorised unit trusts that do not invest in residential property

·       Unlisted Shares

·       Investment trusts subject to FSA regulation

·       Unitised insurance funds from EU insurers and IPAs

·       Deposits and deposit interests

·       Commercial property (inc. hotel rooms)

·       Ground rents (as long as they do not contain any element of residential property)

·       Traded endowments policies

·       Derivatives products such as a Contract for difference (CFD)

·       Gold bullion,

Investments currently permitted by primary legislation but subsequently made subject to heavy tax penalties (and therefore typically not allowed by SIPP providers) include :

·       Any item of tangible moveable property (whose market value does not exceed £6,000) - subject to further conditions on use of property

·       Other exotic assets like vintage cars, wine, stamps and art

·       Residential property

·        

How much can I contribute to a SIPP?

 The contribution limits and tax advantages of SIPPs are identical to those of other types of personal pension, such as stakeholder pensions.

You can invest up 100 per cent of your earned income subject to a limit of £255,000 in the tax year 2010-11 

Since April 6 2006, it has been possible to pay into a Self Invested Personal Pension, as well as other pension schemes, including company pension schemes, providing you do not contribute more than 100 per cent of your earnings in total (subject to the annual contribution limit applicable at the time).

The annual tax free contribution limit will rise each year as follows:

2008-09 - £235,000

2009-10 – £245,000

2010-11 - £255,000

Is there a limit on how much I can hold in a SIPP?

The other limit you need to keep an eye on is the lifetime allowance – the name given to the maximum you can hold in any type of pension and still enjoy the tax privileges associated with pensions.

If the total value of all your pensions exceeds this limit (at the time you take your pension), there will be a charge on the excess over £1.65m of 25 per cent if  taken as income, and a 55 per cent charge if taken as cash.

The lifetime allowance will rise each year as follows:

Allowance      Tax Year

1.65m           2008/09

£1.75m         2009/10

£1.8m           2010/11- 2011/16

There are complex transitional arrangements for people who had more than £1.5m in total in their pensions before 6 April 2006 (the lifetime allowance in 2006-07) and individuals in this position are strongly recommended to take specialist independent financial advice to protect your position, if you have not already done so.

Why Use A SIPP

Self Invested Pension Plans have the same tax advantages as normal pension. In simple terms, this means that a tax payer will receive a boost on their contribution depending on their tax rate.

A basic rate UK tax payer investing £800 a year would get a further £200 paid in by the government into a SIPP of their choice. A higher rate tax payer, making the same £800 net contribution would get an uplift of  £533.33 in tax relief.

In effect this means that a basic rate tax payer gets an automatic 25% return on their contribution whereas a higher are tax payer gets an immediate return of 66.67% return. Even in the most dramatically poor financial markets this represents a huge benefit for UK tax payers.

As SIPPs allow investment in a wide range of available options, it is an excellent tax efficient way to maximize growth.

Choosing a SIPP Provider

Areas to consider

Charges

Existing Pension Fund size

Range of investments needed

Administration

Charges

 There are a variety of potential charges including Establishment charges, Annual Management Charges, share dealing charges, unit trust and investment trust charges, one off charges for specific transactions (e.g. commercial property purchase)

Pension Fund Size & Range of Investments

 Historically SIPPs had high entry levels (> £100,000) but this has changed drastically in the last two years. However, clearly the larger the fund size the greater the scope of flexibility in investment choices.

As a general guide, pension funds of around £50,000-£100,000 should consider some the lower cost online fund supermarket solutions available.

For larger funds (£100,000 - £250,000) there are a range of insurers and stockbrokers that would provide a cost effective and flexible SIPP that would allow for a reasonably comprehensive range of investments.

For funds of over £250,000 a more bespoke trustee based SIPP may be required which would allow access to the whole range of SIPP investments.

Administration

 This is always a crucial area for any SIPP regardless of whether complex investments are involved. Being able to get access to information and making transactions are essential when considering the importance of retirement planning. A lot of SIPP providers provide on line access which for some investors may be crucial