Self-invested Personal Pensions (SIPPs)
What is a SIPP?
A SIPP is a Self-Invested Personal Pension - a type of personal pension scheme.
The SIPP itself is a pension 'wrapper' that holds investments until you retire and start to draw a pension income. Most SIPPs allow investment in a range of assets including commercial property. SIPPs are designed for people who want to manage their own fund by dealing with, and switching, their investments when they choose. They may have higher charges than other personal pensions or stakeholder pensions. As with any pension fund, you cannot take money from the fund until age 50 (rising to age 55 by 2010).
Unsecured Pension (USP) (Income Drawdown)
One of the benefits of most SIPPs is that, within the rules, it is possible to take your Tax-free cash allowance out but leave the balance of your retirement fund invested until later. This is known as Income Drawdown. Since 6th. April 2006, the minimum level of income that you must draw is now NIL, with the maximum being defined by what is known as the GAD (Government Actuary Department) calculation.
You can increase your level of income drawn over the years up to age 75, by which time the full income level must be taken.
One advantage of this is that the annuity rate (the rate at which your pension fund provides you with income) tends to increase with age. You may not need additional income at present, as it would normally add to your tax bill, especially if you are still working.
A disadvantage is that, if you defer taking it for too long, you may die before getting the advantage of the income, although the remaining fund is normally returned to your estate, or could provide your spouse or partner with an income after your death.
Rather than being forced to purchase an annuity, ASP now offers greater choice and flexibility for those over age 75. It enables them to continue drawing an income directly from their fund in a similar way to Unsecured Pension. ASP will not be suitable for all individuals but it does provide more control over income and investments than annuities. Individuals who are looking for a guaranteed income may still be more suited to annuity purchase – Following the pre-budget report that took effect from 6 April 2007 individuals in ASP must take a minimum income of 55% of the GAD rate for a 75 year old with a maximum of 90%.
So when would ASP be suitable?
ASP may be the preferred option for those individuals looking to retain control over their investments, as their fund remains invested. Once an individual is in ASP, they can still choose to buy an annuity at any time so it may also be used to defer annuity purchase as opposed to deciding against it completely. However, it is important to be aware that it may provide less income than if an annuity had been bought in the first place. ASP is also likely to be chosen because of the improved death benefits that it offers via Family SIPP.
Family Self Invested Personal Pension (SIPP)
Family SIPP is the term used to describe passing on pension funds from ASP. If the member dies while taking ASP, the remaining fund will be used to provide income for any financial dependants, for example a husband, wife or civil partner, or any financially dependent children. In this case the fund is passed to them to provide an income, either through Unsecured Pension (USP), ASP (dependent on age) or via an annuity. There is no tax charge on this transfer at this point but if the fund is then passed on again, it would be subject to the relevant tax charge. The pre budget report mentioned previously (effective from 6 April 2007) also proposed to impose an unauthorised payment charge of up to 70% where remaining ASP funds are transferred to the pension fund of other members of the same scheme. This charge is in addition to the IHT charge. This would mean that the overall tax charge on death would be 82% after the 70% on the residual fund after 40% IHT.
If there is no widow or dependants, then the remaining ASP fund may be used to provide benefits for other members of the scheme, or can be left to a charity. This means that a member can nominate who they want to receive some, or all, of the pension fund. The fund can only be passed onto a nominated person if they have a pension of their own within the same scheme.
ASP, USP and SIPPs are a complex area. It's a good idea to get professional advice because what you decide now will affect your pension income for the rest of your life
The information set out on this page is intended to provide a general appreciation of the topic and it is not advice. Guidance should be sought from a specialist who is qualified to advise in your specific circumstances.
For more information on any aspect of Pensions please contact Surrey Financial Advice on 01483 211800 or email us at admin@surreyifa.co.uk We will be happy to assist you.
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