Starting Your SIPP

A SIPP can be set up either by an individual or through their employer. All SIPPs need to be set up via a HMRC approved provider to gain the tax exemptions which they offer you. These consist of insurance companies, specialist providers, fund managers and pension consultants amongst others.

A SIPP can be created from naught or set up by a transfer from another pension plan. The plan will consist of at least a Trustee and Scheme Administrator; however some providers may use multiple companies to set up your SIPP. If your plan is trust based and you are not the trustee, the provider or another HMRC approved company must act as a trustee.

Do I need significant wealth to set up a SIPP?

No, but the larger the fund the more beneficial investment opportunities arise. Charges imposed by providers are usually subject to a minimum flat rate fee, which can render smaller contributions unviable. You can use your SIPP to invest in property; however the funds must be sufficient enough to purchase the property either outright or with a mortgage as SIPPs are restricted in the amount they can borrow.

Facts

To analyse, a SIPP is essentially a pension wrapper that can hold a variety of different investments and aims to provide you with tax efficient savings for your retirement. SIPPs offer a far greater level of control for an individual than most conventional pensions whilst allowing them to pick and choose their own investment strategy.

It is fairly common for persons to have more than one pension scheme. One of the more beneficial selling points of SIPPs is that you can transfer in pre-existing pensions, allowing you to consolidate your pension savings into one easier to manage plan.

Recent Changes

If you fall under any of the following criteria it is suggested that you speak with a qualified financial adviser to discuss the recent change in regulations regarding pensions.

  • If you are or are getting divorced
  • If you own a personal pension which is ‘frozen’
  • If you work for a company pension where your employer has ceased trading or is closing down
  • If you have a pension plan with a company that no longer issues pensions

Since the new regulations came into force on pension ‘A’ day in April 2006 the law regarding charging structures have changed drastically. Due to the introduction of stakeholder pensions, charges applied to new pension plans are more often than not considerably lower than previously. This means that many individuals who have existing pension plans may be being overcharged on outdated pension contracts. Furthermore, the majority of older pension plans are facing a shortfall on maturity due to poor performance. It is for these reasons that more people nowadays are using SIPPs as their premier pension scheme.

Tax Benefits

A basic tax relief of 20% can be applied to all pension contributions by HMRC, however, higher rate tax payers may also be eligible to claim the difference back in their self-assessment at the end of each year. To qualify for the higher (40%) tax rate your income must be between GBP37.4K and GBP 150K. If your income exceeds GBP150K you may be liable to an additional rate of 50%.

New restrictions imposed by the UK government now include employer contributions, meaning that those with incomes over GBP130K will no longer be entitled to a higher rate of tax relief. Once you have invested into your SIPP the gains you make will be free of Income and UK capital gains tax.

Should you pass away before you start receiving your pension benefits then the remaining funds can be passed to your spouse, family or any other predetermined beneficiary as a lump sum, tax free (if under 75). If you have taken benefits, or are over 75, then a special death lump sum tax charge of 55% is levied on lump sum payments, or the amount can be passed to a dependent to provide them with a pension (without the deduction of tax at this point).