Self-invested personal pension
Encyclopedia
A Self-Invested Personal Pension (SIPP) is the name given to the type of UK-government-approved personal pension scheme
, which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue & Customs (HMRC).
SIPPs are a type of Personal Pension Plan. Another subset of this type of pension is the Stakeholder Pension Plan. SIPPs, in common with personal pension schemes, are tax "wrappers", allowing tax rebates on contributions in exchange for limits on accessibility. The HMRC rules allow for a greater range of investments to be held than Personal Pension Plans, notably equities and property. Rules for contributions, benefit withdrawal etc are the same as for other personal pension schemes.
All assets are permitted by HMRC, however some will be subject to tax charges. The assets that are not subject to a tax charge are:
Investments currently permitted by primary legislation but subsequently made subject to heavy tax penalties (and therefore typically not allowed by SIPP providers) include :
. SIPPs appear to be gaining in popularity amongst UK investors, with Standard Life reporting a 38% increase during the first half of 2011.
The role of the scheme administrator in this situation is to control what is happening and to ensure that the requirements for tax approval continue to be met.
The pensions industry has gravitated towards three industry terms to describe generic SIPP types:
. Employer contributions are allowable against corporation or income tax.
Income from assets within the scheme is untaxed (although it is not possible to reclaim Dividend Tax). Growth is free from capital gains tax
(CGT).
At any time after the SIPP holder reaches early retirement age (55 from Apr 2010) they may elect to take a Pension from some or all of their fund. After taking up to 25% (as of 2010) as Tax free Pension Commencement 'lump sum' the remaining money must be moved into DrawDown (and continue to be invested) or an Annuity purchased. Drawdown income is limited (by the provider) to approx 7% of the drawdown fund value (this is reviewed every 5 years). Income taken from DrawDown or an Annuity is taxed 'as if' earned income at the members highest marginal rate.
Rules exist to prevent the Pension Commencement 'lump sum' being 'recycled' back into the SIPP (and neither drawdown nor annuity payments count as 'earned income' for the purpose of making SIPP contributions).
If the fund value exceeds the 'Lifetime Allowance' of £1.8 million (tax years 2010/11 and 2011/12) at retirement, then the amount above £1.8 million will be taxed at 55%. From April 2012 the 'Lifetime Allowance' will fall to £1.5 million but there will be provisions for those previously relying on the higher limit.
SIPPs can borrow up to 50% of the net value of the pension fund to invest in any assets, although in practice SIPP trustees are only likely to permit this for commercial property purchase.
Personal pension scheme
A Personal Pension Scheme , sometimes called a Personal Pension Plan , is a UK tax-privileged individual investment vehicle, with the primary purpose of building a capital sum to provide retirement benefits, although it may also be used to provide death benefits.These plans first became available...
, which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue & Customs (HMRC).
SIPPs are a type of Personal Pension Plan. Another subset of this type of pension is the Stakeholder Pension Plan. SIPPs, in common with personal pension schemes, are tax "wrappers", allowing tax rebates on contributions in exchange for limits on accessibility. The HMRC rules allow for a greater range of investments to be held than Personal Pension Plans, notably equities and property. Rules for contributions, benefit withdrawal etc are the same as for other personal pension schemes.
Investment choice
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 that are not subject to a tax charge are:
- Stocks and shares listed on a recognised exchange
- Futures and options traded on recognised futures exchange
- Validated carbon credits (VCS & Gold standard)
- Authorised UK unit trustUnit trustA unit trust is a form of collective investment constituted under a trust deed.Found in Australia, Ireland, the Isle of Man, Jersey, New Zealand, South Africa, Singapore, Malaysia and the UK, unit trusts offer access to a wide range of securities....
s and OEICs and other UCITS funds - Unauthorised unit trustUnit trustA unit trust is a form of collective investment constituted under a trust deed.Found in Australia, Ireland, the Isle of Man, Jersey, New Zealand, South Africa, Singapore, Malaysia and the UK, unit trusts offer access to a wide range of securities....
s that do not invest in residential property - Unlisted Shares
- Investment trustInvestment trustAn Investment trust is a form of collective investment found mostly in the United Kingdom. Investment trusts are closed-end funds and are constituted as public limited companies....
s subject to FSAFinancial Services AuthorityThe Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
regulation - Unitised insurance fundUnitised insurance fundUnitised insurance funds or unit-linked insurance funds are a form of collective investment offered through life assurance policies.An insurance company's contract may offer a choice of unit-linked funds to invest in. Insurers that offer these contracts are mainly found in the UK and British Isles...
s 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 differenceContract for differenceIn finance, a contract for difference is a contract between two parties, typically described as "buyer" and "seller", stipulating that the buyer will pay to the seller the difference between the current value of an asset and its value at contract time...
(CFD) - Gold bullionGold as an investmentOf all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or harbor against economic, political, or social fiat currency crises...
, which is specifically allowed for in legislation
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
History
The rules and conditions for a broader range of investments were originally set out in Joint Office Memorandum 101 issued by the Inland Revenue in 1989. The Finance Act 2004 implemented wide-ranging changes to the UK pensions regime, most of which came into force on 6 April 2006 (also known as A-Day). The legislation is commonly referred to as pension simplificationPension simplification
Pension tax simplification, often simply referred to as "pension simplification" and taking effect from A-day in 6 April 2006 was a policy announced in 2004 by the Labour government to rationalise the British tax system as applied to pension schemes...
. SIPPs appear to be gaining in popularity amongst UK investors, with Standard Life reporting a 38% increase during the first half of 2011.
Structure
Unlike conventional personal pensions where the provider as trustee has ownership and control of the assets, in a SIPP the member may have ownership of the assets (via an individual trust) as long as the scheme administrator is a co-trustee to exercise control. In practice, most SIPPs do not work this way and simply have the provider as SIPP trustee. Sippdeal launched the first online SIPP in October 2000.The role of the scheme administrator in this situation is to control what is happening and to ensure that the requirements for tax approval continue to be met.
The pensions industry has gravitated towards three industry terms to describe generic SIPP types:
- Deferred. This is effectively a Personal Pension Plan in which most or all of the pension assets are generally held in insured pension funds (although some providers will offer direct access to mutual funds). Self-investment or income withdrawal activity is deferred until an indeterminate date, and this gives rise to the name. In some newer schemes of this type, there are over 1,000 fund options, so they are not as restrictive as they once were.
- Hybrid. A scheme in which some of the assets must always be held in conventional insured pension funds, with the rest being able to be 'self-invested'. This has been a common offering from mainstream personal pension providers, who require insured funds in order to derive their product charges.
- Pure or Full. Schemes offer unrestricted access to many allowable investment asset classes.
Tax treatment
Contributions to SIPPs are treated identically to contributions to personal pensions. Contributions are limited to £3600 (£2880 before 20% tax refund) or 100% of earned income (if higher). The maximum was £235,000 for the 2008/09 tax year but the 'Annual Allowance' for all pension contributions is £50,000 (tax year 2011/12). The SIPP provider claims a Tax refund at the standard rate (20% as of 2009) on behalf of the customer (i.e. you pay £2880 and your fund contribution for the year will become £3600). The 20% is added to the 'pot' some 2–6 weeks after your payment is made. Higher-rate Tax Payers must claim any additional Tax refund through their tax returnTax return
A tax return is a tax form that can be filed with a government body to declare liability for taxation in various countries:* Tax return * Tax return * Tax return * Tax return...
. Employer contributions are allowable against corporation or income tax.
Income from assets within the scheme is untaxed (although it is not possible to reclaim Dividend Tax). Growth is free from capital gains tax
Capital gains tax
A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...
(CGT).
At any time after the SIPP holder reaches early retirement age (55 from Apr 2010) they may elect to take a Pension from some or all of their fund. After taking up to 25% (as of 2010) as Tax free Pension Commencement 'lump sum' the remaining money must be moved into DrawDown (and continue to be invested) or an Annuity purchased. Drawdown income is limited (by the provider) to approx 7% of the drawdown fund value (this is reviewed every 5 years). Income taken from DrawDown or an Annuity is taxed 'as if' earned income at the members highest marginal rate.
Rules exist to prevent the Pension Commencement 'lump sum' being 'recycled' back into the SIPP (and neither drawdown nor annuity payments count as 'earned income' for the purpose of making SIPP contributions).
If the fund value exceeds the 'Lifetime Allowance' of £1.8 million (tax years 2010/11 and 2011/12) at retirement, then the amount above £1.8 million will be taxed at 55%. From April 2012 the 'Lifetime Allowance' will fall to £1.5 million but there will be provisions for those previously relying on the higher limit.
SIPPs can borrow up to 50% of the net value of the pension fund to invest in any assets, although in practice SIPP trustees are only likely to permit this for commercial property purchase.