SIPP Explained

SIPP’s were first introduced in 1989 and were designed to give people more flexibility and control over their pensions. Traditionally, pensions only allowed you to select from a few funds, which ironically were normally ones that were run by the pension company’s own fund managers. A SIPP however, allows you to choose from a world wide range of funds and other kinds of investments – even shares and stocks are permitted.

There are certain similarities with QROPS but essentially, they key difference is a SIPP retains its UK tax status. As with QROPS, they are also fully approved by HMRC and provide an unrivalled option for retirement pensions of those clients who wish to remain a tax-paying citizen of their home country. A SIPP allows a single arrangement to consolidate multiple pensions, whether current and not performing well, current but in the process of being wound-up or frozen, into a single administered trust.

What is a SIPP Pension Transfer?

A SIPP pension transfer is a transfer of multiple or a single, existing or “frozen” pension into another approved pension scheme. SIPP means Self Invested Personal Plan, and is a fantastic option if you are not an expatriate or do not qualify for a QROPS pension transfer. A SIPP is often described as a 'pension wrapper' into which you can put various investments.

The reason that a SIPP pension transfer is such an attractive option is due to the investment limitations and risks attached to either a current or “frozen” pension. Most people have a limited understanding of their pensions and as a result are ignorant of these limitations. There has been a lot of recent, media coverage on the UK’s pension deficit so there is now, at least an awareness of the risks involved with today’s final salary, company pensions. A SIPP pension transfer gives the client the opportunity to transfer away from this inherent risk and into a fund that directly benefits from an actively managed, broader range of international investments.

Under a SIPP you can choose to manage the investments yourself, appoint a financial adviser or appoint an investment manager to advise you or manage your investments. This means that, subject to what legislation will allow, you can decide when, where and how to invest your pension contributions. It is important to recognize however, that a single fund manager is unlikely to have the best record across all fund sectors (this is one potential drawback of using a single manager).

You can make either a regular payment into your SIPP or a single payment and can transfer one or more other pensions into it. Any money from existing pension funds can be transferred into your SIPP free of tax but you may be charged an administrative transfer fee, so make sure that you factor this in when doing so. If you are currently employed then your employer may also make contributions to your SIPP.

From April 2006, it became possible to pay up to £215 000 into a SIPP each year. This will increase to £255 000 in April, 2010 - as most clients will earn less than this, the most you will be able to pay in will be limited to your gross pensionable income. You should also be aware that this transfer will be tax free.

What are the Benefits of a SIPP Pension Transfer?

SIPP’s are now a real solution for cost effective pension planning. They offer the widest possible choice of investments for individual pension plans, allowing holders to pick funds from across the world wide market.

Since SIPP’s are tax “wrappers”, they allow tax rebates on your contributions in exchange for restrictions on accessibility; you can hold a larger selection of investments with a SIPP than you can with regular personal pension plan. Regulations concerning contributions and benefit withdrawal are the same as with other personal pension schemes.

There are significant tax benefits to saving in a pension such as SIPP - the government contributes 20% of the gross contribution that you pay, which means that an investment of £1,000 in your SIPP costs you just £800. If you currently have a higher tax rate, then the benefits may be even greater. For the above example, you could claim back up to a further £200 from your tax return if you have adequate income or gains in the higher rate tax bracket.

When you reach the age of 50 (55 from April, 2010), if you wish to withdraw the funds from your SIPP, you can take up to 25% of your fund as a tax free, cash lump sum. The remaining 75% is then used to provide you an ‘income for life’.

Who qualifies for a SIPP Pension Transfer?

You are eligible for a SIPP pension transfer if you:

• You neither qualify nor want a QROPS pension transfer, i.e. domiciled in your home country
• Are under the age of 75 & want to contribute to a SIPP
• You wish to transfer to a SIPP only – If all you wish to contribute into the SIPP is a transfer value from an existing pension then this is the only eligibility requirement. There may, however, be restrictions on the form of transfer value that is eligible.

As part of the UK Governments’ pension reforms in April 2006, new rules were introduced that gave much greater scope for making contributions and increased flexibility in taking benefits. You are also now not limited on the number or kind of pension plans that you can contribute. For example, you can be a member of a company pension scheme and at the same time contribute money to another personal pension plan.

Most people are eligible to invest in SIPPS, including the following:

• Self Employed
• Non-working spouses
• UK residents living overseas

UK basic rate income tax relief will also be available, provided you are under 75 and your pension plan's contributions meet the registration conditions set by the HRMC.

How do I invest in a SIPP?

There are two ways of investing in a SIPP: Contributions or Transfers.

• Contributions - A Contribution is when you open a SIPP and then put money in it. Because it is a pension you cannot remove the money, as you will receive tax relief on your contribution from the government. You can contribute funds or transfer an existing pension into a SIPP or do both.
• Transfers - A Transfer is when you open a SIPP and transfer an existing pension you hold elsewhere into it. You may also be able to contribute money or transfer funds to a SIPP Transfer if you have unused contributions left for that year.

What type of Investments can be ‘wrapped’ into a SIPP?

Approved investments include conventional insured pension funds, stocks and shares, overseas stocks and shares, unit trusts and investment trusts. Also insurance company managed funds, unit-linked funds and commercial property.

Prohibited investments include purchasing residential property, holiday homes and timeshare accommodation, machinery, wines, vintage cars, yachts, jewelry, gold bullion and coins.

Ability to hold Protected Rights pension funds

Protected rights funds are acquired when an investor no longer wishes to have a lower state pension. By doing this the National Insurance payments they have made will be paid back into their pension scheme and this, in addition to the growth, is known as Protected Rights. Pension rules for investors into a SIPP were changed in October 2008, scrapping the rule that people are forbidden from transferring their protected rights into a SIPP. This new ruling has therefore increased the flexibility and choice available.