Hands up if you are fed up with insurance company pensions,
which are expensive to service, provide poor fund performance and
whose administration is less than satisfactory.
If the answer is ‘yes,’ you are in good company. Millions of
people feel the same and are turning to self invested personal
pensions as a way of being able to take control over their own
pension investments. But what are Sipps and why has there been so
much media hype about them?
Sipps are simply an upmarket version of the personal pension and
offer a number of advantages such as:
- A very wide range of investments;
- Flexibility in how you take your pension income;
- Flexibility in how you leave your pension fund to your
dependants;
- The facility to invest in commercial property; and
- The facility to avoid annuity purchase at age 75
Contributions
You can make very large contribution to pensions of up to 100
per cent of your earned income, subject to a limit of £225,000 in
the tax year 2007-08. This limit will increase each year as
follows:
2008-09 £235,000
2009-10 £245,000
2010-11 £255,000
If your total contributions, including those made by an employer
on your behalf exceed the annual limit, you (the employee) will
face a benefit-in-kind income tax charge of 40 per cent on the
excess over the contribution limit.
Life time allowance
This is the value of your total pension savings which you can
draw on in your lifetime without a tax penalty. The allowance in
2007-08 is £1.6 million, but the allowance will increase each year
as follows:
2008-09: £1.65 million
2009-10: £1.75 million
2010-11: £1.8 million
If your fund exceeds this limit and you draw on these excess
funds in retirement, there is a charge of 25 per cent, if pension
is taken as income and 55 per cent if taken as a lump sum.
What is a Sipp provider?
A Sipp provider can be a bank, IFA, stockbroker, wealth manager
or a fund management company. Whoever your Sipp provider is, the
administration of your Sipp is crucial to its success, so it may be
worth taking advice as to which providers have the best
administration.
Your Sipp provider may do the administration itself or
subcontract this to a third party.
Charges
Most providers levy a one-off set up charge and an annual
management fee for administration. Thereafter, the investments you
place within your Sipp will incur various costs, such as the
initial and annual management charges associated with mutual funds
and Oeics, and the transaction costs associated with share dealing
and buying investment trusts.
Commercial property
Investment in property will generate a whole raft of fees which
your provider will supply you with on request. Additional charges
may be levied for other services such as managing an income
drawdown plan, buying annuities, payment of death benefits and ad
hoc valuations.
Transfers-in
Generally speaking, the higher the set-up fee, the more services
are included at the outset. For instance, most providers with a
high set-up fee will administer as many transfers-in of other
pensions as you want without extra charge, providing these are
carried out, or at least notified, to the provider at the
outset.
Some of the lower cost providers will charge a fee for
transfers-in and most will charge for re-registration of
investments, if a transfer is not made in cash.
Rebate only pensions
If you have a ‘rebate only personal pension,’ also known as an
‘appropriate personal pension’ (APP) or ‘protected rights,’ you
will not be able to transfer this into your Sipp.
(APPs were introduced in 1988 to allow people to invest the
rebates payable on National Insurance contributions if you chose to
contract out of what was then called Serps, but now known as the
Second State Pension or S2P.)
The exception is if you have an insurance company Sipp, in which
case you will be allowed to run your APP alongside your Sipp and
invest the money in its insurance company funds, gilts or cash.
Why protected rights are ringfenced?
Because protected rights are intended to replicate the State
pension, the Inland Revenue does not permit them to be self
invested. At the time of writing (April 2007), Sipp providers were
awaiting government guidance on whether Sipp holders will be
allowed to invest protected rights as they wish (a facility known
as ‘self investment’).
This is why most Sipp providers will not accept protected rights
at all, but if they do, the money must be ringfenced in a separate
personal pension and invested in cash or gilts. However, when you
take your pensions benefits, you can take up to 25 per cent of your
protected rights fund as tax free cash.
You get what you pay for
Some of the cheapest Sipps, such as those offered by Alliance
Trust and Hargreaves Lansdown, have no initial or annual fees and
charge only for investment transactions and various services.
If you opt for a Sipp with very low charges, it is unlikely to
offer the facility to do commercial property purchase.
You can take out more than one Sipp, if the thought of having
‘all your eggs in one basket’ worries you. Whether you should
consolidate your pensions within a Sipp is a complex area, on which
you should take specialist independent financial advice from a G60
qualified IFA.
To find an IFA who specialises in pensions in your area, visit
www.unbiased.co.uk
Regulation
Since 6 April 2007, Sipp providers have been required to be be
authorised by the FSA in order to conduct Sipp business. While a
firm is awaiting full authorisation, it will be ‘interim
authorised.’
It is therefore essential that you check your provider is
authorised by the Financial Services Authority before investing.
Fully authorised firms will be on the FSA register which can be
accessed at www.fsa.gov.uk/pages/register where you can search by
firm. Providing the firm is authorised for personal pension
business, this will cover Sipp business.
Compensation
The Financial Service Compensation Scheme only applies to
authorised investment firms in the UK, so the protection of your
investments will depend on whether the investments, your Sipp
provider and your adviser are regulated by the FSA.
Investments such as direct property purchase, private equity and
overseas-based hedge funds are not currently covered by the FSCS,
but most other UK based investments are.