The Do’s and Don’ts of Securing a UK SIPP
Are you a do-it-yourself-er? In this Information Age that we live in, the exchange of copious amounts of information has made such projects easier than ever. With the advent of the Web, we can repair our motor. We can fix a leaky faucet in our home. We can even learn how to get rid of those pesky moles that keep popping up in our lawn! The benefits of do-it-yourself projects are significant. In addition to saving money and learning a new task, we feel empowered having solved a problem independently.
Do-it-yourself with SIPPs
If you need a pension, then you should consider a SIPP, or Self-Invested Personal Pensions. A SIPP is a “do-it-yourself” type of pension that gives you the opportunity to make your own contribution into a personal pension pot.
SIPS were born in 1989. Since then, the Chancellor of the Exchequer redefined SIPPS, enacting rules that were implemented in April of 2006. This allowed investors to include nearly anything in sipp investment. However, ultimately only private property could be invested into SIPPS.
You can secure SIPPs through several specialist investment insurers and firms. Also, as with any other type of investment, make to shop around to find the one that best suits your needs. And keep in mind that you will probably have to pay various fees for a SIPP. Finally, be wary of SIPPS without set-up or annual fees. In the long term, the total fees may be higher than normal.
Playing by the rules
What are the new sipp pension rules?
1. To take out a SIPP, you must be a resident of the UK and less than 75-years-old.
2. You can now annually contribute a maximum of £215,000 into SIPPs. By the year 2010, the government will raise that figure to £255,000. The majority of us in the UK earn less than that figure. If you are in that situation, the maximum you can contribute is equal to your gross pensionable income, and it will be tax-free.
3. According to sipps rules, the maximum amount you can borrow from SIPPS is 50% of the value of the fund. Thus, someone with a £250,000 fund could borrow up to £125,000, to invest.
4. You are allowed to transfer funds from other pension funds, into SIPPS, tax-free.
5. You can invest property in a SIPP; however, there are particular conditions and restrictions that apply. A syndicate of 10 or more people must purchase the property. Furthermore, the members of that syndicate cannot be related. And finally, members of the syndicate cannot utilize the property for personal use. So that rules out property used as holiday homes, and buy-to-let property.
6. After taking out a SIPP, in most cases you will still be required to purchase an annuity. However, at the age of 75, you could keep withdrawing from your SIPP pension fund, via an “Alternative Second Income.”
Taking a SIPP
Here are all of the items that you may include in a SIPP:
· deposit accounts (with banks and building societies)
· direct property investment
· government securities
· insurance company funds
· investment trusts
· national savings products
· property
· stocks and shares (quotes on a recognised UK/overseas stock exchange)
· traded endowment policies
· unit trusts
The tax man cometh?
Another important issue regarding SIPPs, involves taxes. When you use your SIPP fund to make purchases such as property, the taxman grants the fund a credit that is equal to the basic tax rate. Then at the end of the year, higher rate taxpayers can claim a cash rebate that is equal to the difference between the tax received in the fund (i.e. 22%), and the top tax rate (i.e. 40%).
In this example, the 18% rebate applies to the entire initial investment, in addition to the extra 22% credit that the fund received. What does it all mean? Essentially, the net tax break will be higher than the official 40%.
Also, you may be wondering whether or not investing in a SIPP can help you to avoid paying an inheritance tax. The answer is “yes.” If an individual dies before taking out assets from their pension fund, his or her family members could inherit it, without needing to pay inheritance tax. The best way to clearly avoid paying heritance tax is to heed professional advice, to take into consideration your unique situation.
These tax issues are rather complicated, so if it seems somewhat overwhelming, it is perfectly alright. Your financial adviser and accountant will be able to clarify everything regarding SIPPs and taxes.
The good news and the bad news about SIPPs
Pros
When you compare sipp to other types of investments, you will discover that SIPPs have both pros and cons. The most obvious perk is that all investments in a SIPP are tax free. For higher rate payers, that translates into a discount of a whopping 40%! But even for average rate payers, savings of 20% is outstanding. In addition to the tax savings on the investment itself, the intricate structure of the tax system means that you can avail of further savings. In other words, when taking out a SIPP, the tax savings have just begun!
Cons
Of course, no discussion about an investment option would be complete without addressing some of the drawbacks of a SIPP:
· Your pension fund, not you, will own a property that you buy through a SIPP. So that means you must get authorization from the trustees, before making any type of home improvements.
· A property may not be a solid investment for a pension fund, if you lack a huge fund.
· When selling your own house to your SIPP pension fund, both the buyer and vendor must pay legal fees and stamp duties.
· You must pay a market-rate rent if you live in the house, which can cause any potential savings to plummet.
· If you are nearing retirement you may need to delay it, as houses are not a piece of cake to sell.
· The pension fund must cover all costs related to purchasing a house or flat.
Make sure to visit the site of the Financial Services Authority regarding the rules and regulations related to SIPPs.
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