What types of scheme are available?
Personal/Stakeholder – What’s the difference?
Standard Personal Pension or Self Invested (SIPP)
Why Invest in a Self Invested Personal Pension (SIPP)?
Pensions Simplification 2006
Control over Investments
Administration and Charges
SSAS (Small Self Administered Scheme)
If you are lucky enough to have access to a Pension scheme operated by your employer and they are contributing to it for you this has to be your first port of call! Yes you need to be sure it is an appropriate pension scheme for you but those employer contributions are usually a clincher!
Different types of scheme are documented in our “Company Pension Scheme” section. If like the rest of us mere mortals you have to fend for yourself in the big bad world of retirement provision, then the rest of this section is clearly aimed at you!
To be called a Stakeholder a Pension Policy must meet certain requirements;
- There must be no charges other than an Annual Management Charge and this must not exceed 1.5% of your fund value during the first 10 years and must not exceed 1% thereafter.
- You must be permitted to transfer to another Pension company at any time without charge or penalty.
- You must be able to stop, start, increase or decrease contributions at any time without charge.
- You are able to switch between funds as often as you wish free of charge.
- The minimum contribution is £20
Whilst these are all valuable benefits and enshrined in legislation for your protection, Stakeholder Pensions were designed to encourage the lower paid to save for their retirement and are therefore very much the basic model and only offer a limited range of funds and no opportunity for Self Investment. Also you must purchase an Annuity at retirement, there is no opportunity to enter into Unsecured Pension (income withdrawal)
As the majority of Personal Pensions are now able to run within a Stakeholder framework whilst at the same time offering a much larger range of funds and investment strategies we would not normally therefore recommend a Stakeholder Pension unless you wish to contribute monthly at a level of less than £100 per month.
With a Personal Pension of any kind there are no guarantees and you may get back more or less than you invested. There are certain advantages; for example, you can take your Pension benefits at any time after age 55 and you have maximum flexibility as to how you take your benefits, eg by gradually phasing your retirement.
A Personal Pension can be very much viewed as the middle ground between the low cost simple Stakeholder and the all singing all dancing, and priced accordingly SIPP. The vast majority of our clients are more than adequately served by a Personal Pension with the providers we recommend offering a broad investment choice, competitive charges, and flexibility.
Whilst SIPPs offer virtually unlimited investment opportunities and flexibility these features come at a price, both initially and ongoing, and although they have been receiving substantial amounts of publicity, they may not be for everyone.
The advent of Stakeholder Pensions had the very positive effect of driving down costs for Personal Pensions so that the vast majority of Personal Pensions are no more expensive than their Stakeholder equivalents, yet they usually offer a range of funds and investment strategies not available within a Stakeholder environment.
For example you may be able to access funds from the likes of Fidelity, Invesco, Newton as well as “Manager of Manager” funds and actively Managed Portfolios very often for no more than the cost of an Annual Management Charge. This may be sufficient to meet your needs in terms of flexibility and investment choice without incurring any additional charges that maybe payable through establishing a full SIPP
A Self-Invested Personal Pension (SIPP) is similar to a conventional Personal Pension in as much as it receives payments and transfers from other arrangements with the aim of providing Pension benefits. It differs in the important following details:-
Firstly, as the name implies, a SIPP does not have the investment choice of only one product provider. It is in effect an empty box or wrapper, which can contain any investment approved by HM Revenue & Customs for Pension purposes, some of which are listed below. The important point to note is that by using a SIPP wrapper you are not tied to the products of one , but are free to choose the most suitable investment vehicle for your circumstances both at the present time and at any point in the future.
Secondly, a SIPP arrangement with Pension Fund Withdrawal offers the facility to take retirement benefits by means of drawing income directly from the fund, rather than having to buy an Annuity. This is a particularly important facility because it allows you to remain invested whilst drawing retirement income and has important consequences when considering estate planning and death benefits.
The Choice of Investments
HM Revenue & Customs specifies the types of investments which are permissible, but you still have considerable freedom of choice. We can invest your funds in the following range of investments.
- Stocks and shares quoted on the UK Stock Exchange (e.g. equities, gilts and debentures), including securities on the Alternative Investment Market.
- Stocks and shares traded on a recognized overseas stock exchange.
- Unit trust and investment trusts.
- Insurance company managed funds and unit linked funds.
- Deposit accounts and Bonds.
- Commercial property (although this is only feasible in an exceptional number of cases).
Investments not acceptable to HM Revenue & Customs:-
- Unquoted shares.
- Loans to plan members or any person connected with a plan member. An investment transaction with a plan member or any person connected with a plan member.
- Residential property (including land for residential property development).
- Personal chattels eg wines, art, antiques etc
New legislation in April 2006 introduced a greater range of income choices which are largely determined by prevailing Annuity rates at the time, but they do increase your range of options The legislation also removes the need to purchase an annuity at age 75, although the minimum age benefits can be drawn from will increase to 55 from April 2010, anyone under that age would be unable to take their Pension benefits, if they have not already began doing so.
This could still be the right option for you as you as you will have the choice of opting at age 75 to continue with a form of Income Drawdown called Alternatively Secured Pension(ASP). Unlike Income Drawdown where the GAD rate (ie the income levels) is determined by your age and therefore rises the older you get, the GAD rate under ASP will always assume the age of 75 and you will not be allowed to take any further tax free lump sum after you enter ASP at age 75. You can of course elect to purchase an Annuity at anytime.
With a Pension fund withdrawal plan you can retain greater control over your investments by selecting where to invest the funds and also to switch between asset classes. It is vital that income can be withdrawn from selected, individual asset classes with the opportunity to switch into annuities when appropriate. With the alternative route of buying a conventional Pension annuity, the underlying investment is in UK long-dated Gilts and there is no choice or control once the original investment decision is made.
SIPPs are invariably complicated to administer. The options under them are great in number and it is very important that the company dealing with these is well resourced to make sure that the policies can be dealt with efficiently and correctly, not only when being set up but throughout the life of the policy. Valuations must be readily available, as must be the opportunity to take advantage of the flexibility inherent in these plans. Inevitably this involves additional charges over and above what you would pay for a Personal Pension. For example a SIPP will typically have a set up fee of £175+ and an annual fee of anywhere between £160-£960 and these fees must be paid by retaining monies in your SIPP Bank Account.
If you have a Limited Company there is an additional option available to you. A SSAS is a Company Pension scheme with a maximum of 12 members and it is usually adopted by family run Companies. It has the investment freedom of a SIPP and can also be used to purchase commercial property for your business, and make unsecured loans to your Company.
There are also tax efficient ways to pay pensions and keep assets within the tax free environment of the SSAS for the next generation, this is particularly important if this is your business premises and you wish to ensure continuity.