What is a Self Invested Personal Pension (SIPP) and Can I Afford One?
A Self Invested Personal Pension (SIPP) is a pension plan that allows people to decide exactly how they want their savings to be invested. Funds can be built up in a SIPP over a period of time using either regular or one-off payments, and savers can manage and change their investments as they see fit. When a person is ready to access their funds, and the minimum age of 55 years has been attained, up to one quarter of the amount in the SIPP (25%) can be taken as a tax free lump sum and the rest of the savings can then be used to do one of two things – either to purchase an annuity from an insurance company or to provide the saver with a regular income.
Tax Benefits to Individuals
Funds paid into a SIPP are designated as contributions and the equivalent of a person’s gross earnings in a single year can be contributed. All contributions are net of basic rate tax (20% in 2012). To achieve savings of £20,000, the contribution level would be £16,000; the remaining £4,000 would come from the tax relief to which savers are entitled from Her Majesty’s Revenue and Customs (HMRC). Higher rate taxpayers can gain further tax relief through self-assessment, and 50% taxpayers even more. This tax relief is added to the SIPPs fund and investors should be mindful that the Government sets a cap on the amount of tax relief that can be earned in each tax year.
Those who do not have any earnings in the UK can still benefit, as can those who earn less that £3,600 per year. As long as net contributions to a SIPP are made, up to £2,880 is allowable and HMRC will still add 25% to the fund, or £720 in this example. SIPP funds are free of Income Tax and Capital Gains Tax.
Benefits to Businesses
Employers can pay contributions into a SIPP on behalf of their employees, and these are treated as the employees’ own contributions for tax purposes. The employer will pay the contributions gross and will receive the tax relief on their contributions; the employee will not normally be taxed on these contributions, so both parties benefit. A good PAYE payroll company will include SIPPs payments in the payroll systems it offers.
Another benefit of a SIPP is the wide range of investment choices that can be made. Savers can choose shares, warrants or unit trusts, for example, as well as bonds and investment trusts. With some types of SIPP it is also possible to invest in commercial property. This means that direct investment in business premises and rental income from the premises can be added to a SIPP to support retirement savings.
There are lots of different sorts of SIPPs to choose from and a financial advisor will normally work with a client to identify the most appropriate types. Different levels of fees apply depending on how complex, or otherwise, an investment portfolio is. A thorough risk assessment will help individuals and businesses to decide which SIPP is right for them.