SIPPs
Self-Invested Personal Pension – Regaining full control of your pension!
All of AJP’s investment projects are SIPP compatible, providing you as the investor, the opportunity to earn more from working with us. However, if you are unfamiliar as to how these investments operate, we have compiled a short guide that set out the basic principles.
A SIPP, or a Self-Invested Personal Pension in its abbreviated form, is the name given to a certain type of investment that has been examined and approved by the UK government as a pension scheme. The scheme allows individuals to make their own investment decisions from a list of HM Revenue and Customs (HMRC) approved investments.
Due to the fact that SIPPs are a type of Personal Pension Plan, they are allowed similar tax rebates on contributions in exchange for limits on accessibility. Having said this, under HMRC rules, SIPPs are permitted to hold a greater range of investments than Personal Pension Plans, particularly in equities and property.
Investment Choice
There are specific assets within a SIPP, where investors are able to make choices regarding the purchase and the disposal. This is subject to the approval of the SIPP trustees, who are usually the SIPP provider. All of these assets are permitted by the HMRC under SIPP regulation. Having said this, some are subject to heavy tax penalties. The assets that do not attract a tax charge are:
- Stocks and shares listed on recognised exchanges
- Futures and options traded on recognised exchanges
- Authorised UK unit trusts
- Unauthorised unit trusts which do not invest in residential property
- Unlisted shares
- Investment trusts under FSA regulation
- Unitised insurance funds from EU insurers
- Deposits and deposit interests
- Commercial property – including hotel rooms
- Ground rents containing no element of residential property
- Traded endowment policies
- Derivatives products
- Gold bullion
Various other investments that are not allowed but also incur a heavy tax penalty include:
Tangible moveable property which does not exceed £6,000 in market value
Other exotic assets such as vintage cars, wine, art, collectibles and Residential property
Types of SIPPs
There are various differences in using a SIPP from the typical pension. One of the reasons is because SIPP members are allowed to have full control of the ownership of the assets in the scheme. This is so long as the scheme administrator is a co-trustee to exercise control over the assets. The role of the administrator is to control exactly what is happening and to ensure that the scheme requirements for tax approval continue to be met.
There are 3 types of schemes with regards to SIPPs. They are:
Deferred – This is essentially a Personal Pension Plan where the majority of the pension assets are held in insured pension funds. Self-investment activity or income withdrawal is usually deferred until a future, intermediate date
Hybrid – This is where some of the assets of the scheme are help in a traditional insured pension fund, with the remainder being ‘self-invested’. Many mainstream personal pension providers commonly offer this option now
Pure of Full – Unrestricted access to the many investment asset classes permitted
Tax Situation
The contributions to SIPPs are treated in the same way as they are to any other type of personal pension. They are limited to £2,880 or 100% of earned income, which is a maximum of £255,000 for the 2010 – 2011 tax year. The SIPP provider will then claim a tax refund at the standard rate, which currently stands at 20%. Those who pay a higher rate of tax must claim for additional tax refunds through their tax return. The income from assets within the scheme is untaxed and the growth is free from capital gains tax. After the age of 55 during anytime, the SIPP holder could choose to take a pension from some or their entire fund. After taking around 25% as a tax free lump sum, the amount that remains is moved into DrawDown or an Annuity is purchased.
The income that has been earned by taking money from DrawDown or an Annuity is taxed as if it was earned in any other way. The rules are put in place to stop the tax free lump sum in being reinvested into the SIPP. Should the value exceed the ‘lifetime alloweance’ of £1.8million for the 2010 – 2011 tax year at retirement, the additional money will be taxed at 55%. Having a SIPP can also borrow up to 50% of their value to invest in any assets. This is usually only permitted by the trustees for the purpose of investing in commercial real estate.
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