Self Invested Personal Pensions

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Self-invested Personal Pensions

A Self-Invested Personal Pension (SIPP) is a UK government-approved personal pension scheme that gives you more control over how your contributions are invested, as well as greater flexibility into how much money you withdraw for your pension, as well as the age at which you can start making withdrawals.

Explaining Self-Invested Personal Pensions (SIPPs)

A SIPP is a UK-based pension scheme that’s flexible and functional. Essentially it is a pension wrapper that can accommodate a wide range of international investments. A SIPP will always have a value, normally in pounds sterling, and this value is what your pension is worth. This value will go up and down, depending on the performance of the underlying investments that are held within the SIPP. SIPPs can be beneficial to a wide range of people living in the UK and abroad.

Why are SIPPS suddenly growing in popularity?

The UK economy has experienced a number of major changes in recent history, and many individuals are unsure of how to best manage and protect their wealth, in particular with their pension.

The UK previously taxed pensions 55% upon death, however this has now been abolished, and changed to either 0% death tax if the member dies before 75 years of age, or the beneficiaries marginal income rate if the member dies after age 75. Additionally, pension holders are no longer required to purchase an annuity. Lastly, on April 5th 2015, the UK government permitted ‘Flexi Access’, which allowed individuals to have unlimited access to their pension fund from the age of 55. This permits unlimited withdrawals, all of which were treated as taxable UK income.

All the above changes have decreased demand for qualifying recognised overseas pension schemes (QROPS), making SIPPs more attractive to some. Additionally, the introduction of the 25% overseas tax charge on moving pensions to a QROPS has also meant an increasing demand for SIPPs, persuading members to move out of a Final Salary scheme, and in to a defined contribution scheme, such as a SIPP

What investments can be held in a SIPP?

As mentioned above, a SIPP can hold a variety of different assets, with the main asset classes listed below;

  • Shares/Equities
  • Mutual Funds
  • Bonds
  • Futures
  • Gilts
  • Commercial property holdings

Why would I move my pension to a SIPP?

Depending on what type of pension you already have, there may be a good argument to move it to a SIPP.

Private pension/money purchase/defined contribution

A defined contribution pension is where you build up a pot of money through contributions through employment and this is invested in order to grow and provide you with a retirement. The value of the pot is directly related to what you can have as a pension, for example if the pot of money increases over time, the amount you can withdraw annually as a pension will increase.  This is unlike Final Salary pensions – which provide an exact and specific income.

You may wish to move your pension into a SIPP for the below reasons;

  • If you have several pension pots, it may be worthwhile moving them altogether and putting them in a SIPP. This will allow for much easier management, when it comes to both investing in funds, as well as drawing down your pension when you retire.
  • Some schemes are quite expensive, and so moving to a SIPP may reduce your annual management costs.
  • Some schemes are limited to their investment choices, for example some large providers in the UK will only offer funds managed by their own team. These restrictions can limit your investment growth, which is why members often prefer a SIPPS due to the almost unlimited choice of investments available.
  • Clients are finding it extremely difficult to contact or discuss their pension as UK providers are notoriously poor at communication. Moving to a SIPP will allow you to speak to someone on your time zone and with much less hassle.

Benefits of a SIPP in short

SIPPs make the most sense for clients who want to take control.

A SIPP can do any of the below;

  • Allows you to retire as early as age 55
  • Offers you greater flexibility over death benefits, passing on more to your beneficiaries
  • Allows you to withdraw your full pension thanks to the flexi access rules
  • Gives the option to take 25% of the total pension as a tax free lump sum at age 55

Final Salary Scheme/Defined Benefit

If you have a company pension scheme (for example you worked for company, and at a certain age, normally 65, the company promises to pay you x amount per year until you die, based on your salary and service), then you may have the option to transfer out of the scheme and move the money in to a SIPP.

There are several reasons why many people consider this option;

  • Moving out of a Defined Benefit scheme and in to a SIPP means that you have greater control of when you retire. Most schemes stipulate you retire at 65, however moving to a SIPP means that you can retire as early as age 55.
  • If you want to take out a lump sum, this can often be difficult with a Final Salary scheme. With a SIPP, you are eligible to take out a 25% tax-free lump sum at age 55.
  • If you have several Final Salary pensions, you are able to move them all in to one SIPP, for easier management and administration.
  • When you actually transfer your pension from a Final Salary scheme to a SIPP, you write to the scheme asking for a CETV (Cash Equivalent Transfer Value). The actuaries then make several calculations and give you a figure of what they think your pension is worth as a cash lump sum. These values fluctuate along with market conditions, and as interest rates are historically low, this means the amount the companies offer you to leave the pension scheme is unusually high, causing more and more members to leave their scheme and move it to a more flexible pension, such as a SIPP.
  • Due to the aging population, the pension deficit in companies is growing, which means in turn they have to some how reduce the members benefits in order to ensure they can meet their liabilities. Companies can achieve this by either increasing the retirement age to 66 or 67, or alternatively decrease the rate at which the pensions increase on annual basis (by changing the index from RPI to CPI). Moving to a SIPP would mean the company is no longer in control of your pension, or when you can retire. You can now take the reigns.
  • With a normal Final Salary scheme, you must retire at 65, and take payments monthly or annually until you die, there is no stopping or starting or delaying retirement. This can be inconvenient if you are in a high UK income tax bracket. With a SIPP, your options on taking a pension are much more flexible. For example, good tax planning may include taking a pension when your income in the UK is low, and then refrain from taking an income from your pension if you have other sources of UK income. This would keep your UK income tax liability at a minimum, something you cannot do with a Final Salary Pension.