There is a greater need for flexibility in terms of when and how benefits are drawn and this flexibility needs to be reflected in our pension arrangements. Wealth management consultant Michael Hulse talks us through one such option…
At its simplest, a self-invested personal pension (SIPP) is an investment ‘wrapper’ designed to help you accumulate savings tax efficiently that are then used to provide an income in retirement.
In reality – and unlike a traditional company pension or insurance company pension – a SIPP offers far more, and not just when it comes to investment choices and how benefits are drawn. Here are some of the key things you should know…
A SIPP provides a large amount of flexibility allowing individuals to invest in a wide range of assets including:
- quoted UK and overseas stocks and shares
- unlisted company shares, subject to criteria (for example private limited companies and limited liability partnerships)
- collective investments such as unit trusts and open-ended investment companies (OEICs)
- investment trusts
- land and commercial property
- deposit accounts with National Savings and Investments (NS&I) and banks and building societies
Such investment flexibility allows individuals to tailor their investments to their own needs, rather than being dictated to by the choice available from an insurance company. Not all SIPPs offer the same level of investment flexibility and careful research should be undertaken to ensure the SIPP will meet your needs both now and in future.
A SIPP can take full advantage of the new pensions flexibilities – whether that’s in drawing the tax-free lump sum as a single payment or over several years, or the ability to take a flexible level of income.
This flexibility really comes to the fore when you reflect on modern retirement strategies – quickly disappearing are the days when retirement was a single day in time when you moved from full-time work to not working at all. Instead, retirement is now more of a transition period potentially lasting many years, with individuals reducing their working hours – maybe even starting at an earlier age – while continuing to work for longer and using a flexible income from their SIPP to meet their changing needs.
A SIPP offers a transparent charging structure, making it quite clear what fees are a) levied for the SIPP wrapper itself, b) related to investments and c) related to consultancy. Within traditional insurance company and company pension schemes, charges are a single figure, so there is no clear explanation as to what the cost provides, or how the cost is split.
In the event of death prior to age 75, the benefits of a SIPP can be distributed to the nominated beneficiaries, normally tax-free. Given the tax efficiency of a pension, it is more common for the benefits to remain within the pension and withdrawals taken to meet the needs of the beneficiary rather than a single lump sum. With that in mind, the investment freedom and flexibility become more important.
Death benefits can also be paid to a pension death benefit trust rather than a named individual(s), the benefit being their retention within a trust enables the original member to retain control from ‘beyond the grave’.
A SIPP can accept personal contributions made net of basic-rate tax relief. As an example, a relievable contribution of £1,600 would be grossed up at the current relevant rate to £2,000 within the pension scheme. If the contributor is a higher rate taxpayer or Scottish intermediate rate taxpayer, the balance of relief would be claimed via their tax return.
Contributions can also be accepted from an employer providing complete flexibility. In today’s working environment there is no career for life, which leads to individuals changing employment not just from employers, but also into self-employment. A SIPP provides the flexibility to allow contributions both now and in the future.
A SIPP can also receive transfers from other pension schemes, subject to review. Having all your pension benefits in one plan makes reviewing and planning far easier while reducing the administrative burden. It also ensures a consistent investment strategy can be put in place encompassing all resources.
A SIPP allows the purchase of commercial property, potentially permitting a member to utilise their pension within their business. Once acquired, the tenant – often the member’s own business – will pay a market rent to the pension tax-free, which in turn will build up within their pension to provide an income in retirement. Such planning minimises the ‘dead money’ spent on rent while providing a known income stream.
A SIPP can borrow up to 50% of its net value for further investment. Such borrowing must be on commercial terms but the ability to ‘gear-up’ can assist with property acquisition where the rental income covers the borrowing repayments.
A SIPP is typically considered an individual personal pension arrangement. However, it is possible to have a multiple-member pension scheme – e.g. a husband and wife can combine resources in a single pension.
It is also possible to acquire an asset using several individual SIPPs, i.e. the directors of a business acquiring a joint asset in the form of their commercial premises using individual arrangements. The rent is then split in proportion to members’ ownership, but it allows the members to invest the balance of their pension without other scheme members’ involvement.
Subject to a review, a SIPP can purchase shares in unlisted shares, including limited companies. This is a way of releasing funds from a pension to invest in a business while ensuring dividends and any capital growth in the share value is protected within the tax-efficient pension wrapper.
A SIPP is an incredibly flexible investment tool that goes far beyond providing a means of saving for retirement. Future articles will consider in more detail some of the planning that can be undertaken to maximise the benefits from the flexibility we have summarised here.