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SIPP
SIPP - Taking Control Of Your Pension |
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One of the best aids to helping people to take an active interest in their pension planning was the
introduction of the Self Invested Personal Pension Plan (SIPP). This is a completely self managed
pension fund where you are responsible for all the investment decisions and, as a result, the outcome
when it comes time to cash in the fund and convert it to income. SIPPs are extremely flexible and can run alongside a normal company pension scheme. There are rules regarding how much can be contributed, but they are reasonably generous. For example, in the tax year 2009/10, you can contribute up to 100% of your earnings up to a maximum of £245,000. Even if you are not earning, you can still contribute nearly £3,000 into the SIPP. All contributions are eligible for tax relief at your marginal rate with the SIPP provider claiming back the basic rate tax on the contribution on your behalf with you making any additional claim via your annual tax return. This means that for every £1,000 contributed by you, the tax man will contribute a further £250 (for basic tax payers). If you are a higher rate tax payer, you can currently reclaim a further £150 through your annual tax return. Many companies offer SIPPs and provide on-line access to manage the funds. Some may charge a set up fee but all will make an annual charge to run the account. Look out for the best rates – currently being offered by Hargreaves Lansdown, with other competitive offers from Fidelity, FundsNetwork, Kilik and James Hay. Once you have made your cash contribution, you can then choose how you would like to invest. Many offer competitive rates of interest on cash held pending investment. These are usually in shares or investment funds but other types of assets can also be added to the account (dependent upon your provider). With on-line management, cash can be added at any time and you can change your investments based on your latest thoughts! Switching will incur charges, as per any trading account, so ensure that you do your research and switch when ready. Managing your investments requires some knowledge of how the markets work and the vagaries of share, currency or fund movements. Therefore, if you are not confident, do not use a SIPP as your main pension planning vehicle. Once you have opened a SIPP, you can transfer in existing defined contribution pension funds currently held with other providers. This way, you can get all your pension planning under one account. However, be aware that in the event of the failure of a provider, the Financial Services Compensation Scheme rules on what is covered is complex. Essentially, the first £30,000 is fully covered along with 90% of the next £20,000. This provides protection for £48,000 – which is not a large sum to have in a pension fund these days! With the changing economic and fiscal landscape, it is possible that the higher rate tax relief currently claimable on contributions may be abolished. Therefore, if you are thinking of opening a SIPP and/or making cash contributions you should check to make sure that the higher rate relief is available. Once you reach age 50, you can start to draw funds out of your SIPP. However, this is limited to 25% tax free and the remainder must be converted into annuities. There is nothing preventing you from holding the funds under management up to age 75 or taking only some of the fund and converting it into annuities. Whilst there has been much talk of changing the rules to allow other forms rather than annuities, it remains the only way to convert pension funds into income form a SIPP (apart from the tax free cash withdrawal). For those with some financial awareness and a desire to take control of part of their pension planning, a SIPP is an excellent, tax efficient way to save for the future. The flexibility and freedom of investment is far greater than with any company scheme and the contribution limits relatively generous. Make sure to do your research as to the best provider for your personal circumstances – although you can transfer to another provider at a later stage for a fee. |