SIPP into your future

15th October 2018

Extra flexibility over your pension savings in retirement

It’s never too early – or too late – to start saving for your future. With retirement planning, it is important to take into account the fact we’re all living longer. Couple that with the fact that the cost of living continues to rise, and the value of the State Pension continues to dwindle – this provides a very strong case for starting to save early for your future.

For appropriate investors, one option is a Self-Invested Personal Pension (or SIPP). This is a wrapper for pension investments that allows investors to make their own investment decisions. It’s suitable for those people who are comfortable with making their own investment decisions about their retirement.

Extra flexibility

SIPPs can be opened by anyone living in the UK, although it should be noted that all personal tax relief stops at age 75 and only employer contributions receive relief after that age. You can open a SIPP for yourself or for someone else, such as a child or grandchild. Even if you’ve already retired, you can still open a SIPP and take advantage of the extra flexibility that it gives you over your pension savings in retirement – but you may be limited by how much you can pay into it.

SIPP investments

SIPPs offer a wider investment choice than most traditional pensions based on investments approved by HM Revenue & Customs (HMRC). They give you the chance to pick exactly where you want your money to go and enable you to choose and change your investments when you want, giving you control of your pension and how it is organised.

Most SIPPs allow you to select from a range of assets, including:

• Unit trusts
• Investment trusts
• Government securities
• Insurance company funds
• Some National Savings and Investment products
• Deposit accounts with banks and building societies
• Commercial property (such as offices, shops or factory premises)
• Individual stocks and shares quoted on a recognised UK or overseas stock exchange

These aren’t all of the investment options that are available – different SIPP providers offer different investment options.

Residential property can’t be held directly in a SIPP with the tax advantages that usually accompany pension investments.
But, subject to some restrictions (including on personal use), residential property can be held in a SIPP through certain types of collective investments, such as real estate investment trusts, without losing the tax advantages. Not all SIPP providers accept this type of investment though.

Tax treatment

Currently, an investor can receive up to 45% tax relief when they make a personal contribution to a personal pension such as a SIPP, with 20% paid by the HMRC to the pension and any higher and additional-rate tax relief reclaimable via your tax return.
Non-earners can pay a maximum of £3,600 pa (£2,880 net) with tax relief but non-taxpaying individuals who earn up to £11,800 pa (in 2018/19) may receive tax relief on up to 100% of their earnings paid as a contribution to their pension. In addition to upfront tax relief, money in a pension is free from Capital Gains Tax and Income Tax on the investments. The tax treatment of pensions depends on the individual’s circumstances and is subject to change in future.

Making withdrawals

From age 55 onwards (proposed to change to 57 from 2028, although this is subject to change as it has not yet entered full legislation), you have the option of making withdrawals. Typically, you may take 25% of the pension tax-free, and the rest is taxed as income. Instead of purchasing an annuity at age 75, you can keep the portfolio in which your SIPP is invested.

Residual monies

Any residual monies left in your pension when you die can typically be passed to your heirs free of an Inheritance Tax charge. Any withdrawals your heirs then make will usually be tax-free if you died before you were aged 75. If you die when aged 75 or older, any withdrawals will be taxed as income at their marginal rate.

Sophisticated investors

Investing your retirement savings in a SIPP is not for everyone. While they offer greater flexibility than traditional pension schemes, they may have higher charges and are more suitable for more experienced, sophisticated investors. Contributions are also limited to the Annual Allowance, plus any Carry Forward, and you cannot access a pension until age 55 unless you are in a special profession. Income is taxable, and additional tax is payable if you exceed the Lifetime Allowance.

A SIPP PENSION IS A LONG-TERM INVESTMENT.
THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.
PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.