A SIPP is a Self-Invested Personal Pension. Contributions to a SIPP can be made in a variety of different forms. These range from a one off investment, a regular contribution, or a transfer in from an existing policy, such as occupational pension schemes, final salary schemes, section 32 buy-out policies, free standing additional voluntary contribution schemes, retirement annuity contracts, and personal pension schemes.
With effect from October 2008, it has also been possible to transfer in Protected Rights funds into a SIPP. These are funds that have been built up through the member being contracted out of the State Second Pension S2P, formerly known as SERPS.
The maximum allowable investment into a SIPP is subject to the same Annual Allowance rules as other pension schemes, and is also subject to change at the will of the Government. Currently it is possible to contribute as much as you want to your pension’s scheme, which is effectively capped at £50,000. This is known as your annual allowance, and applies to anything committed to the scheme, including contributions from employers. There are opportunities to pay more into your pension scheme, but there are certain traps to watch out for, including charges for exceeding certain amounts. For more detailed information on this, simply ask one of our financial advisers.
Loans and Borrowing using your SIPP
A SIPP may make loans to unconnected third parties, but not the members of the SIPP, provided they are on a prudent, secure and commercial basis.
SIPPs will let you borrow for any legitimate purpose intended to further the aims of the scheme, and such borrowing will be limited to 50% of the value of the scheme's net assets at that time. So, for example, if a SIPP is worth £100,000, it can borrow £50,000 to give it a total value of £150,000 to invest.
SIPP Tax Savings
Contributions to Personal Pensions generate direct tax savings. Contributions are made net of tax relief, which means that you will only actually contribute a portion of the contributions made. Higher rate taxpayers make contributions net of basic rate tax, and can then claim additional relief via their Inspector of Taxes/Self Assessment return. For more information, please contact one of our financial advisers.
Your pension contributions will grow in funds where there is no liability to tax on capital gains and where all forms of investment income (except dividends) are also tax free. Your money may therefore grow faster in a Personal Pension than in most other forms of investment.
At retirement you have the option to take up to 25% of the fund as a tax free cash lump sum. You no longer need to take all your benefits by the time you are 75 but after this age, you can only take benefits as income. If the total value of all your pension benefits exceeds your "Lifetime Allowance" you will be subject to a tax charge of up to 55%. Again this is a figure that is subject to change, and rates are likely to be altered annually.