SIPPs Explained

Quick note to all: Here at World Wide Resource we offer our own opinions based on extensive market knowledge and experience which works for us and by extension works for our clients. We are analysts and do not offer advice. We are not FSA regulated, we don't have to be and don't want to be. Any new clients wishing to organise a SIPP with any of our recommendations will have that SIPP professionally dealt with by an approved, FSA regulated IFA

Who are SIPPs for?

In simple terms, a self-invested personal pension puts the investor in control of their pension planning. Traditionally SIPPs have been the domain of the wealthy and as a general rule of thumb you had to have a pension fund with a value greater than £200,000 in order to make it worth your while.

Times have changed. Funds have changed. Now the same model is available to most.

In its simplest form, a SIPP allows an investor much greater access to the investments markets.

Whilst SIPPs can potentially be extremely sophisticated and complicated and can provide excellent tax planning solutions, there is no reason why they cannot be used simply to provide an investor with more control over their pension planning by providing a wider range of investment options. In the current difficult financial markets it is essential to have the maximum amount of flexibility when planning for retirement.

Unlike "normal" Personal Pension Schemes you will all be able to borrow against the assets of your SIPP Fund in order to invest more aggressively or simply to leverage your buying power and returns on investment.

There are some fairly strict rules concerning borrowing money against your SIPP Pension, for example you can only finance 50% of the value of any residential property that you purchase. Some of the disadvantages are less obvious but should still be considered and discussed with a Qualified Advisor before committing yourselves to a SIPP.

If you are living overseas permanently or are planning to in the near future then a QROPS transfer might be something worth considering.

A QROPS is a Qualifying Recognised Overseas Pension Scheme which has been approved by Her Majesty´s Revenue & Customs to accept a pension transfer from a UK pension scheme. They offer enormous financial benefits for the thousands upon thousands of ex-pats now living or planning to live out their retirement abroad.

This ability to transfer a pension from the UK to another country was brought into action on 6th April 2006, dubbed 'A-Day', when massive reforms swept through personal and work pensions in the UK. Under these changes people no longer resident in the UK, but who had UK pensions, were allowed to transfer their pensions across to a QROPS, provided they met certain conditions.

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% and 40% depending on what the current tax rates are and what personal tax band you are in.

SIPPs have been around for a long time, since 1989, but after the introduction of Pension Simplification legislation in 2006, SIPPs have become more accessible. 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.
With a SIPP you are free to invest in:

Unit Trusts
OEICs
Investment Trusts
Insurances Company Funds
UK Gilts
UK Shares
US & European Shares
Bonds
PIBS
Cash & Deposit Accounts

 
Commercial Property - Buying Commercial Property with a SIPP is one of the oldest advantages of having a SIPP.
The most straightforward way most larger pension funds use a SIPP is to buy their own business premises. this allows for several tax advantages, from the growth of the property being free capital gains tax, to the fact that the rental income will be paid directly into the SIPP hence allowing for further pension growth.

With regards to Inheritance tax, since a SIPP is free of inheritance tax liabilities, this may also allow for further tax planning regarding protecting a business' assets.
Borrowing to finance a commercial property is also viable via a SIPP with most SIPP trustees allowing for borrowings of up to 50% of the pension fund. As an example, if a pension fund was valued at £200,000, the fund would be able to borrow a further £100,000 and the invest in a £300,000 valued commercial property.
A lot of people also use their SIPP as protection against insolvency as it is the Pension Fund that owns the property not the individual. You can transfer your existing personal pension fund to a suitable SIPP.
Additionally, there are further commercial property investments that can now be made via a SIPP, which include:

Hotel Room Investments
Prison Property investments
Overseas Commercial property investments 
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The most important thing to remember is that the range of available investments depends largely on the choice of SIPP provider. Ultimately it is down to the trustees of your pension plan to agree whether they are happy to accept your investment choices into the SIPP. After all, the trustees are responsible and liable for ensuring that the investment choices fall within their remit.

Why Use A SIPP?

Self Invested Pension Plans have the same tax advantages of normal pension plans. In simple terms, this allows an investor to benefit from generous tax relief provided from the UK government on their contribtuions. Again, 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 governemnt into a SIPP of their choice. A higher rate tax payer, using the same contribution would get a £533.33. In effect this means that a basic rate tax payer gets an automatic 25% return on their contribution whereas a higher rate 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.

Transferring Pensions To A SIPP

SIPP Considerations Transferring in

Charges -  Existing charges on current pension plan. How do they compare to a SIPP? A direct comparison via an illustration should be used to have an idea of comparable costs. Whilst many people perceive that SIPPs are a more expensive choice this may not necessarily be the case especially when compared with older pension plans.

Time to retirement -  How close an investor is to retirement will affect how they want to either take their benefit (if they are near retirement) or how long term their investment strategy is if they are a long way from retirement

Investment Objectives -  An investor needs to address whether their existing pension planning is still relevant and still provides the structure that their portfolio requires

Investment Strategy -  Does the investor have a different risk profile that may be better served under a SIPP?

Guarantees and options -  Are there any existing guarantees built in with an investors current pension plans?

With Profit Funds -  Are there any penalties for transfer? Obviously this applies across the range of potential transfers but With Profits Funds are particularly susceptible to adjustments on transferring out (often referred to as Market Value reductions or MVA)

Protected Rights Changes

SIPPs will now be allowed to hold Protected Rights. The effective date was 1st October 2008.

Protected Rights will be permitted to be invested in the full range of investments allowable under a SIPP.

The Protected Rights pot must be tracked separately and used to pay a 50% spouses pension when used to purchase an annuity (if applicable)

All other retirement options will be available

Small Self Administered Pensions (SSAS) will not be able to hold protected rights 
 

How much can I pay into a SIPP?

There is sometimes confusion on the maximum amount that can be paid into any form of pension planning. There is in fact NO financial limit on the amount that can be contributed to a registered pension scheme. However, there is a maximum amount on which an individual can claim tax relief in any tax year. This is set out as either

£3,600 or
100% of an individuals UK relevant earnings up to a maximum of £235,000 (2008-09)

On top of that there is also a Lifetime Allowance of cumulative funds in pensions which is currently £1,650,000.

Alternatively an employer can make an annual contribution of up to £235,000 on behalf of an employee regardless of the employees remuneration.

Pension Glossary

Accrual Rate
The amount by which your pension increases annually
Annuity
A contract that is taken out with an insurance company stating that they will pay you a regular income for the remainder of your life in exchange for all or part of your pension.
Additional Voluntary Contributions -  AVCs
This is where you can make extra contributions to your occupational pension scheme in order to increase the size of your fund.
Basic State Pension
This is the pension that you receive from the Government at the official retirement age. This amount is also linked to the National Insurance contributions that you have made over the course of your working life.
Contracting-Out
Where you leave the State Second Pension and set up your own personal pension scheme with a life assurance company or fund management company. Or join a company that has an occupational pension scheme. The pension that is formed by contracting-out is sometimes called a 'rebate-only personal pension'. The Government will pay the minimum contribution into your opt-out personal pension for you (a rebate on your National Insurance Contributions).
Defined Contribution
Another type of occupational pension scheme, also called a Money Purchase Plan. You and/or your employer make contributions to a scheme, the scheme then invests the money. The value of your pension is not guaranteed as it is directly linked to the performance of your investments.
FSA
The FSA is the Financial Services Authority. The FSA has been formed by the Government as an Independent body who regulates the financial services industry and protects the rights of those investing money in the UK.
Group Personal Pension Plan
This is where a number of employees from one company each have a Personal Pension Plan that is held with the same pension provider. Although there may be other benefits attached each employee has their own pension plan.
Income Drawdown
Also known as a pension fund withdrawal. This enables you to take a taxable income from your own pension; it also allows you to delay purchasing an annuity until the maximum upper age limit of 75.
Minimum Income Guarantee - MIG
A guaranteed minimum benefit that is means tested. The MIG is meant for those who have little or no retirement income apart from the State Pension.
National Association of Pension Funds
The National Association of Pension Funds campaign the various Government Departments and Regulators such as the FSA in order to achieve greater clarity in the Pension market. They main aim is to protect the rights of those people who have occupational pension schemes.
Occupational Pension Scheme
An Employer organized pension plan that is set up to provide retirement benefits for the employees. These types of schemes very often offer other benefits such as life insurance and sickness insurance.
Occupational Pensions Advisory Service
A voluntary organization that provides independent help and advice for people who have any issues to do with their Personal or Occupational Pension Scheme.
Occupational Pensions Regulatory Authority
Established as a consequence of the 1995 Pensions Act, OPRA is the official UK regulator of Employer offered pension schemes.
Pension Fund
This is the fund that you pay into that in turn invests its funds into a wide range of products. You can normally either specify what type of investment funds you want to be involved in or choose to have the fund completely managed by the pension company.
Personal Pension Plan
A personal pension scheme that is usually managed by a financial services company. Although the plans are called personal pension plans your employer can also contribute to the plan.
Self-Invested Personal Pension
Set for wholesale changes in April 2006; Sipps are the most talked about pension product at the moment. Essentially Sipps are designed to let individuals take control of their own pension funds and of course the investments it makes.
Stakeholder Pension
Introduced in April 2001 Stakeholder pensions have not been as successful as first hoped for. The pensions were designed to encourage low-income earners to start saving for their retirement. You can pay in from as little as £20 per month and the charges are to kept to a maximum of 1%
State Pension Age
The subject of much debate at the moment this is the date at which you are entitled to draw your state pension. As people live longer now than ever before there is talk of the retirement age increasing to 67 for men but we are not sure how this will effect the age from which you can receive your state pension.
Unit Linked
You can pay your pension fund into a selection of Unit Linked funds. The value of the funds will either increase or decrease according to the performance of the investments held within the Unit Link fund.
With-Profits Fund
Not so popular now with profit funds were designed to smooth out the good and bad years. This type of fund can often incur heavy penalties should you decide to retire or take your pension early.

Futher reading: FT Advisor

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