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Retirement:
Self Invested Personal Pension

A Self Invested Personal Pension (SIPP) is a form of money purchase personal pension. The main difference between SIPPS and other personal pensions is that a SIPP gives you the opportunity to decide on the investments to be held. You can include funds managed by different investment managers within one large pension portfolio. This diversity is particularly attractive if you have a large fund and are considering using income drawdown or withdrawal after retirement. The investments can essentially be segmented, using part for income drawdown or withdrawal with the balance remaining uncrystallised, giving better death benefits.

A SIPP is also able to invest in commercial property. This can be useful if an individual or business wants to buy commercial property from which to carry on the business. The commercial property can be bought by the pension fund and leased to the business. The rent paid to the fund is tax deductible and the fund receives the rent gross. Borrowing is also possible, but this is limited to 50% of the net fund value of the SIPP.

The pension can be taken between ages 50 and 75 (55 from April 2010) and an income withdrawal facility can be offered. (If the member cannot work because of ill health or is in an occupation recognised as needing an earlier ‘normal retirement’ age, they may be able to draw out the money before age 50.) The income from the pension (whether annuity or income withdrawal) is taxable.

Your pension provider will claim basic rate tax relief from HM Revenue & Customs and add it to your pension account. So if you pay £78, £100 will be credited to your pension account. The extra £22 tax relief is claimed on your behalf by your pension provider.

If you pay higher rate tax you will need to claim additional tax relief, usually on your self assessment tax return.

The pension benefits available

With a personal pension you can take your retirement benefits between the ages of 50 and 75 (55 from April 2010). The benefits paid on retirement depend on the amount of contributions that have been paid and the investment return achieved. Generally the fund built up at retirement can be taken as a tax-free pension commencement lump sum of not more than 25% of the fund with the balance being used to provide an income.


Example

Mr E was self employed as a builder for his working life and had a personal pension. At retirement Mr E had a pension fund of £200,000 which gave him the following pension benefits:

A pension lump sum of 25% of the pension fund = £50,000
An annual pension bought with the remaining fund (£150,000) = £10,600
(Based upon male age 65, single life, 5 year guaranteed, level payment annuity.)

The majority of people buy an annuity with the balance of the fund. This gives them an annual pension and can include options such as an increasing pension, a dependant’s pension or a guaranteed period of payment.

Related literature:

An alternative to buying an annuity is unsecured income pension fund withdrawal. Instead of purchasing an annuity you are able to draw an income from the pension fund directly. There are limits for the amount you can take each year based on Government Actuaries Department limits.

If you want to take your benefits as unsecured income, generally you need a large fund to help protect against investment volatility. This reduces the effect of the higher charges that SIPPs often incur.

The opportunity for investment diversity and flexibility of SIPPs make them a vehicle that is frequently used when you take pension fund withdrawals.

Related literature:

Annuities and income withdrawals are taxed like earnings from an employer under the PAYE system. This means that your personal pension provider will include your personal tax allowances and reliefs (shown in your tax code) and will deduct any tax you are due to pay before paying your annuity to you.

What happens if I stop paying into the plan?

If you want to stop your contributions to the scheme you have the following options:

It is important to take professional advice as to the best option for you. If you are no longer contributing to a pension fund with a high level of management charges, these charges can seriously erode your ultimate pension benefits particularly if the scheme has poor investment growth. If you wish to transfer your pension fund to another pension scheme your original pension fund holder may impose substantial penalties reducing the fund available to transfer.

What happens when I die?

The death benefits depend on whether you have started receiving your pension when you die and how you have chosen to take your pension:

If you die before you start receiving your pension the value of your fund will be paid to your estate or to an individual you have previously nominated to receive the fund on your death.

If you die whilst receiving your pension as an annuity the death benefits will be those selected by you when you purchased your annuity, typically a pension for your spouse or other dependants together with any amounts outstanding in respect of a guaranteed period.

If you die whilst receiving your pension as unsecured income you will generally have had the option of nominating that the fund is to provide benefits for your spouse or other dependants. They will have the option of:

If you die whilst receiving your pension as alternatively secured pension (ASP) your dependant(s) will be able to:

If you have no dependants the ASP can be paid tax-free to a nominated charity or pass as a pension transfer to another member of the same pension scheme. This could be liable to inheritance tax.

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