Self Invested Personal Pensions Advice

A Self Invested Personal Pension, a SIPP, is exactly what it sounds like. 

It is a personal pension that is allowed to invest in areas outside of the normal insurance company funds and policies, you have control over these decisions.  You select the investments and it can own and invest directly in things like stocks and shares, commercial property and other areas such as unit trusts, traded endowment policies and bank deposits. 

For this additional flexibility of choosing investments yourself,  there may be additional charges made by the pension scheme provider.

Permitted Investments

Unlike the old pension rules (before April 2006), HM Revenue and customs have removed many of the restrictions on the types of things a pension fund can invest in.  The following list is not complete but we hope it gives you an idea of the things that you could control in your pension fund:

• Stocks and shares of companies including investment trust companies and oeics listed on Inland Revenue recognised stock exchanges
• Fixed interest securities, warrants, Permanent Interest Bearing Shares, debenture stocks and loan stocks and convertible securities
• Futures and options
• Approved unit trusts and unapproved ones, if tax exempt
• United States Mutual Funds (if recognised by the UK Financial Conduct Authority)
• Insurance funds and unit linked funds of a UK or European Union Life Company
• Traded Endowment Policies
• Deposit accounts with a recognised financial institution
• Worldwide commercial property and land including farm land and forestry, freehold or leasehold
• Residential Property or land only if an element of residential property is within a commercial purchase e.g.  an on site flat for a caretaker, this may be allowed or if only a minor share as part of a multi-owner group e.g.  20 separate pension funds are buying equal shares as a commercial transaction

Restricted and Prohibited Investments

Instead of focusing on having a prohibited investments lists, HM Revenue and Customs has set down some rules regarding alternative investments that are closely monitored and with much tighter rules to avoid 'naïve' pension investors being caught out or indeed abusing the new flexibility

Restricted Investments - these can be done but there are special rules that have to be complied with

• Lending money to your Company
• Buying shares in your Company
• Investments that benefit pension fund members at below commercial rates

Prohibited Investments - these are specifically excluded

• Residential property - prohibited except as above
• Works of Art - prohibited
• Fine wines - prohibited
• Stamps - prohibited
• Antiques - prohibited

Pension Borrowing Rules

The trustees of a SIPP used to have unlimited powers to borrow.   This is now restricted in that the pension fund is allowed to borrow on a mortgage a figure equal to 50% of the pension fund value.  In plain English, a 50% deposit by the fund is required e.g a pension fund worth £100,000 can borrow £50,000.

Who can have a self invested personal pension plan?

Under Pension Simplication rules you are now eligible to contribute to such a plan if you are a UK employer or a UK Relevant Individual and receive tax relief on contributions made.  Even if you do not live in the UK you may still be able to pay into a UK pension plan.  

What can I pay into a SIPP?

You are allowed to contribute premiums to as many SIPPs or indeed any other pension plans as you want up to the Annual Allowance.  The Annual Allowance started in 2006/07 at £200,000 pa.  This means you may be able to pay huge sums into your pension without any complex calculations.  

How much should I save in my SIPP?

This is a personal choice based on what you can afford.  We have produced a number of calculators to help you decide and you should try them to see if they help you.  

What happens to my money that I have paid in?

Your pension money is invested normally in collective funds with other pension savers or in direct investment holding as suggested above.  You technically buy shares in your fund known as 'units' in the pension fund.  Pension funds invest in a wide range of areas such as cash, property, fixed interest stock, bonds, shares, overseas shares and much more. 

How does my SIPP grow?

If the value of an asset owned by the pension fund goes up in value For example, a Shopping centre owned by a pension property fund, then the 'unit price' value of your 'shares' or 'units' in that fund goes up.  

When can I retire from a SIPP?

You can retire from this type of scheme after the age of 50 until April 2010 and age 55 after April 2010.  

What happens to my SIPP at retirement?

At retirement you are allowed to receive a tax free lump sum of 25% of the fund value and the balance can then be used to purchase a retirement income.  Think of it like investing money in a bank account, you cannot have the money back and you receive income on the money you invested.  

There are three types of income style at the chosen retirement date; some are more risky than others: Secured Income (an annuity), Unsecured Income and for some over 75's Alternatively Secured Income.  

What is the maximum pension I can receive when I retire?

There is no maximum pension you can receive.  Your pension income depends upon the size of the fund that you have built up and then what income/interest rate that fund can then pay out.   If your fund grows to a huge fund there will be tax penalties if it is above the Lifetime Allowance .  

The Lifetime Allowance started in 2006/07 at £1.5m and increases most years so it should not affect the majority of us.   If you have selected Unsecured Income you will have a choice of income levels from £0 up to 120% of the Government's Standard Annuity Level for your age and for over 75's Alternatively Secured Income you will have a choice of income levels from £0 up to 70% of the Government Standard Annuity Secured Income.  

What happens if I die?

If you die before you have retired ie not taken income or tax free cash from your pension your heirs will normally receive the whole pension fund as a lump sum.  If you die and you are already receiving benefits, cash or pension or both, if it is Secured Income (annuity) your heirs may or may not be able to receive a balance of the fund paid depending upon the type of annuity you invested in.  If you die and you are receiving benefits under Unsecured Income or Alternatively Secured Income you heirs may receive some or all or all of the fund subject to tax penalties and/or inheritance tax.  

Can I have Life Insurance Cover?

Most Personal Pension plan providers can offer you Personal Pension Plan life cover.  Tax relief on the premiums has now been withdrawn.  It used to be that the premiums you paid for life insurance received tax relief on the premiums making them cheaper.  If you die and your heirs receive Pension Life Cover pay outs plus the value of the pension fund and it exceeds the Lifetime Allowance there will be a tax charge.

What is a waiver of premium benefit?

This is offered by most pension providers as a bolt on option to your pension.  This valuable benefit will pay the premiums on your policy if you are unable to work due to long term illness.  Upon illness, the ongoing pension premiums are actually waived by the company but are deemed to have been paid by you.  This cover is inexpensive and ensures that your pension continues uninterrupted.  There is usually a deferred period before this type of benefit is paid and can be between three and six months.  The pension provider will expect you to pay the premiums during the deferred period.  The cost for this benefit can normally be deducted from the overall premium you pay without having to make a separate premium contribution.  You should however, make an allowance for this and increase you overall contribution to ensure that your retirement benefits are not reduced. 

SIPPs can also be used to 'contract out' of the State Second Pension Scheme (S2P) although in practice many people use a normal personal pension plan for this .

How can I apply for a SIPP?

Purchasing a SIPP whilst being a simple process, requires some professional advice as there are certain areas that have to be researched and many contracts have different options and charges for different levels of investment flexibility.

Therefore, we do not allow people to buy these arrangements direct from this site.  We ask that you contact us to take some professional advice, either over the telephone or via a face to face meeting.  Contact us.  
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Old Self Invested Pension Investment Rules - Before April 2006

Permitted Investments were

• Stocks and shares of companies including investment trust companies and oeics listed on Inland Revenue recognised stock exchanges.
• Fixed interest securities, warrants, Permanent Interest Bearing Shares, debenture stocks and loan stocks and convertible securities
• Futures and options
• Approved unit trusts and unapproved ones, if tax exempt
• United States Mutual Funds (if recognised by the UK Financial Services Authority)
• Insurance funds and unit linked funds of a UK or European Union Life Company
• Traded Endowment Policies
• Deposit accounts with a recognised financial institution
• Worldwide commercial property and land including farm land and forestry, freehold or leasehold

Prohibited Investments

• Deposit accounts where they are used for currency speculation
• Residential Property or land only if an element of residential property is within a commercial purchase e.g.  an on site flat for a caretaker, this may be allowed
• Commercial property if the pension member is over age 65 or it is after the normal retirement date
• Loans of any sort
• Milk quotas
• Connected person transactions are not allowed.  E.g.  the pension fund is not allowed to purchase commercial property from the member, family or relative, business partner, connected company directors, the members employer

Pension Borrowing was

The trustees of a SIPP used to have unlimited powers to borrow.  It was limited only by the amount of money a commercial lender such as a bank or building society was prepared to lend the pension scheme trustees.  If you had only a modest amount in your SIPP account, provided there was enough money for a deposit on the commercial property (HM Revenue and Customs set a minimum deposit level of 30% of the total value of the property)  and provided you could secure a commercial lender then there was no reason why the SIPP could not purchase a commercial property.

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