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).
What changes are taking place from April 2006?
SIPPs like other personal pension schemes, will follow the significant changes to the pensions tax regime being introduced from 6 April 2006.
The government had proposed that greater freedom of the choice of investments that could be held in a SIPP would be permitted, to include assets such as residential property and fine wines. However, in his pre-budget statement on 5 December 2005 the Chancellor announced that these types of assets won't get the usual tax advantages enjoyed by other SIPP investments. So it is likely the effect will be to keep the current list of permitted investments, such as stocks and shares, unit trusts, life assurance policies and commercial property.
Are there plans to change the regulation of SIPPs?
The FSA does not currently regulate the advice on joining most SIPPs nor does it regulate some of the permitted investments you can hold inside a SIPP such as commercial property. However, some investments that you can hold in a SIPP are regulated - for example life policies or unit trusts.
The government is proposing that the FSA regulate all SIPPs from April 2007. Until this time, most SIPP wrappers will not be regulated. As a result you cannot generally make a complaint to the Financial Ombudsman Service or get compensation from the Financial Services Compensation Scheme.
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. After 6th. April 2006, the minimum level of income that you must draw is 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.
There are now potentially quite large advantages to be gained from a pension arrangement, unlike any other form of investment in the UK, but there are also some disadvantages which you should be aware of before you make your decision. - Remember, with Surrey Financial Advice, any initial consultation is free of charge (apart from a cup of coffee, perhaps) and you are under no obligation to proceed. [Contact us]
