SIPPs
Why Invest in a Self Invested Personal Pension (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
Pensions Simplification 2006
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.
Flexible Income
The legislation allows retirement income to be drawn from the plan without having to purchase an immediate annuity. This offers the ability to choose a level of income between 0% and 120% of the single life annuity that could otherwise be purchased according to the Government Actuary’s Department’s tables up to age 75. After that age if you elect not to purchase an annuity, you can take between 55%-90% of the GAD limit as income. This offers the ability to match income more closely to needs.
There is opportunity to take some, or all, of the tax-free lump sum at outset and then to draw sufficient taxable income whilst allowing the remaining fund to continue to grow in a Pension fund environment.
Control over Investments
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.
Administration and Charges
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
