Sipp contribution
limits
Before 5 April 2006:
Same as for all other personal pension contributions
17.5% - 40% of your ‘net relevant earnings’ depending on your
age
All contributions subject to an earnings cap of £105, 600
After 6 April 2006:
Contributions across all pensions in aggregate, up to £215,000
(2006-07)
Tax relief on up to 100 pc of your net relevant earning
Lifetime allowance
(LTA)
The LTA, the maximum aggregate total for all your pension
arrangements is £1.5m for 2006-07 tax year
Any pension funds over this amount will be subject to 55 pc tax,
where the excess is taken as cash and 25 pc where this is taken as
income.
Taking benefits before 5 April
2006
At age 50 or over you can take up to 25 pc of the fund as tax free
cash and apply the balance of the fund to purchase an annuity.
Alternatively, you can do ‘income draw down’ - whereby you take up
to 25 pc tax free cash and draw an income from the remaining fund
each year. The latter must be within certain limits laid down by
the Government Actuary’s Department, but is roughly equivalent to
between 35 pc and 100pc of that payable by a standard, level,
annuity payable to someone your age
Taking benefits after 6 April
2006
At Age 50 (age 55 from 2010) you can take up to 25 pc tax free cash
(a maximum of £375,000) and apply the balance of the fund to
purchase an annuity. Alternatively, you can take an ‘unsecured
pension’ which is a more flexible version of income draw down. You
can take between 0 and 120 pc of a single life level annuity.
After age 75:
You can purchase an annuity, or you can take an ‘alternatively
secured pension’ which allows you to draw between 0 and 70 pc of a
single life level annuity payable to someone aged 75.
Investment choice before 5 April
2006
You can invest in equities, fixed interest securities, , debentures
and other loan stock, warrants (for equities), permanent interest
bearing shares, convertible securities, futures and options,
authorised unit trusts, tax exempt unauthorised unit trusts that do
not hold residential property, investment trusts, OEICs, insurance
company managed funds, endowment policies, deposit accounts,
commercial property, UCITS, ground rents.
Investment choice after 6 April
2006
Sipps will be able to invest in all of the currently approved
(pre-A-Day) investments, however the so-caller "exotic investments"
such as fine wines, race horses, stamp collections, yachts and
residential property, such as buy to lets, holiday homes and your
principal private residence, which were to be allowable after
A-Day, April 6th 2006, have no now lost their tax advantages and
are no longer suitable for inclusion in your Sipp.
However, regarding what was considered to be the most exciting
new investment opportunity, residential Buy-to-Let property, this
has also been disallowed but there are opportunities to invest in
collective residential property funds which are run by some of the
large property investment companies and insurance companies. For
further details please contact your adviser.
Tax on property
investments
On property investments within a Sipp which you use yourself, you
must either pay a full market rental or a benefit in kind tax at
40pc.
Existing property which you transfer into your Sipp will have to be
sold and purchased by the Sipp, incurring capital gains tax on sale
(except where you are selling your principal private residence) and
stamp duty on purchase.
If you purchase a foreign property, you will still be liable to
local income tax, capital gains and property taxes.
Borrowing for property
investment
Before 5 April 2006:
Up to 75 pc of purchase price, including purchase costs
After 6 April 2006:
50 pc of fund value
Sipp costs
There
are a large number of Sipp providers offering everything from just
online share trading and mutual fund investment, to full blown
Sipps offering the full range of permitted investments, including
commercial property. Costs vary enormously according to the level
of service and range of investments required. See table for
details. Most, but not all, Sipps will charge a set up fee, an
annual management charge, dealing charges for any investment made
and various fees for other services such as transfers-in,
valuations and statements.
Inheritance tax (IHT) before 5
April 2006
If you take income drawdown and die
before age 75, you may be able to pass your pension fund to your
estate net of 35 pc tax, but free of IHT, providing the policy was
written in trust. By age 75, you must have bought an annuity, which
will probably escape IHT.
IHT after 6 April
2006
Before age 75
If you die before age 75, while taking an ‘unsecured pension,’ you
may be able to pass your fund to your estate free of IHT, but with
a 35 pc tax deduction. But your executors will have to show that
you did not deliberately deprive your estate of income by failing
to buy an annuity. The taxman could challenge your executors if you
lived off the tax free lump sum and never drew any income from the
fund
After age 75
If you die after age 75, while taking an ‘alternatively secured
pension,’ (ASP) your estate is likely to face some form of IHT,
although the exact form and amount has yet to be announced although
for details of the proposed basis, see ‘Family Sipps’
If you buy an annuity, this is likely to escape IHT
Family Sipps and
IHT
If you leave your pension fund to other
members of your family who hold a Sipp with the same provider, you
can bequeath your fund to them but there will be an IHT charge. The
proposed basis for charging IHT on bequeathed pension fund
transfers is to assume that the deceased had bought a 10 year
guaranteed annuity, instead of drawing an ASP. For example, if the
fund at death was worth £100,000, this would buy a 10 year
guaranteed annuity of around £9,000 a year for a 75 year old male.
The value of the 10 instalments would be around £81,000 in today’s
money (assuming a discount for inflation of 2.5pc ), so £81,000
would be added to the estate for IHT purposes. For those dying
after age 75, the annuity rate is likely to be higher, so a higher
sum would be added to the estate. The older the deceased, the more
likely the taxable sum will tend towards the pension fund’s
value.
Disclaimer: HMRC has yet to announce the exact amount and way in
which IHT will apply but it is expected to along the lines of the
proposals outlined above.
Tax relief before 5 April 2006
At your marginal rate of tax on contributions up to:
% Earnings Age
17.5% up to age 35
20% 36-45
25% 46-50
30% 51-55
35% 56-60
40% 61 and over
All subject to an earnings cap of £105,600
Tax relief after 6 April
2006
Annually, the greater of £3,600 and 100 per cent of taxable
earnings may be paid as tax relievable contributions up to £215,000
in tax year 2006-07
No minimum of maximum limit on employer contributions
But, any contributions, made by either yourself or your employer,
in excess of £215,000 will be taxed at 40pc, payable by
yourself.
Choices at
retirement
Before 5 April 2006
Take up to 25 pc of fund as tax free cash and use remainder to buy
an annuity
Take income draw down (see taking benefits for details)
After 6 April 2006
Take up to 25 pc of fund as tax free cash and use remainder to buy
an annuity
Take an ‘unsecured pension’ (UP) up to age 75
After age 75, take an ‘alternatively secured pension’ or ASP (see
Taking Benefits for details of UP and ASP)
Annuities
Before 5 April 2006
Choice of annuity includes level, increasing by set %, inflation
linked, guaranteed for 5 or 10 years, investment linked (unit
linked or with profits), limited period annuity (for 5 years),
joint or single life.
After 6 April 2006
All of the above, plus flexible annuities which will allow one-off
increases in payment (to pay for nursing home fees), and Value
protected (money back) annuities which returns the unused portion
of your fund to your estate, less a 35 pc tax deduction. Limited
period annuities will allow you to buy a fixed term, 5 year annuity
with part of your fund, while leaving the remainder invested in an
Unsecured Pension.
Death benefits after 6 April
2006
Lump sum payments must be tested against the
deceased’s unused Lifetime Allowance (LTA) which will be £1.5m for
pension funds in tax year 2006-07
A tax charge of 55 is payable on any excess paid over the LTA
Any tax due on a lump sum death benefit is the liability of the
recipient
Pension Term
assurance
Before 5April 2006
term assurance contributions (premiums) are capped at 10 pc of your
pension contributions
If you cannot afford to continue paying into your pension, you have
to suspend your term assurance premiums as well.
Tax relief is at your marginal rate
After 6 April 2006:
You can pay as much as you want in term assurance premiums
(providing you don’t exceed the £215,000 annual pension
contribution limit or the £1.5m lifetime allowance or LTA)
This is because your term assurance premiums will count towards
your pension contribution limit of £215,000 (2006-07) and the LTA
of £1.5m
Full tax relief on all term assurance premiums at your marginal
rate
Protecting your
pension
Pension funds in excess of £1.5m (the lifetime allowance, or LTA)
will be taxed at 55 pc (called a recovery charge) where the excess
if taken as cash and 25 pc where taken as taxable income).
You can protect your fund through either primary protection or
enhanced protection
You can register your pension fund for protection up to 5 April
2009, although it is advisable to do so before 5 April 2006.
You should take advice on which form of protection is
appropriate
Primary and enhanced
protection
Primary protection
Primary protection is for those whose funds are valued at, or are
likely to be over, £1.5m on 6 April 2006.
It protects the fund already accrued and allows it to grow in line
with increases in the LTA.
Enhanced protection
Available to anyone, regardless of the size of their fund
It allows you to protect not only the current value but also any
growth in the fund, due to future investment returns. But you must
cease all contributions to all pension plans you hold from 6 April
2006.
Any further contributions will automatically void your enhanced
protection and primary protection will apply.
How do I choose a suitable
Sipp?
First consider the following:
Which type of investments do you want to place in your pension and
how often do you expect to trade in shares?
Will you want to do property purchase?
Check the size of funds you have to transfer into your Sipp to get
started
How much do you intend to contribute each month?
Do you want an online account?
Do you want advice on the investments you make?
See an independent financial adviser who will be able to direct you
to an appropriate adviser