Self-Invested Personal Pensions

Self-Invested Personal Pensions (SIPPs) are subject to the normal rules and regulations for registered pension schemes, but offer the freedom of choice over investment management, whilst keeping the administration in one place.

This means you are able to change the investment manager when you wish, without incurring the expense of changing the provider of the administration. Additionally, you can achieve greater flexibility in the benefits you can take during retirement without necessarily having to transfer your funds again.

You can elect to purchase an annuity or follow the route of phased retirement and/or drawdown pension. There is now no upper age limit at which benefits must be taken.

SIPPs are money purchase schemes with contributions receiving tax relief. An employer may contribute to an individual’s SIPP but this is not obligatory (unless being used to meet auto enrolment obligations). SIPPs can move with individuals when they change jobs, as they are personal to them.

You are free to give direct investment instructions, or more typically, indirectly via an appointed investment manager or adviser. Most types of conventional investments are freely permitted including quoted stocks and shares, unit trusts, insurance policies and commercial property but there are some restrictions designed solely to prevent abuse.

Any SIPP holding prohibited assets directly or indirectly will have all tax advantages removed which will broadly mean that it is at least no more advantageous to hold such assets in a pension scheme than it is to hold them personally. Prohibited assets include direct or indirect investment in residential property and certain other assets such as fine wines, classic cars and art & antiques. SIPPs can also be used to purchase commercial property, albeit this can involve considerable costs.

To be eligible to invest in a PPP and receive tax relief on personal contributions, an individual investor must be under 75 years of age, and resident in the UK (there are some exemptions for individuals who work for the UK Government or have left the UK in the last few years). Contributions can also be made by your employer or a third party e.g. parent or spouse.

The minimum contribution will vary between providers but is usually around £20 per month, and they can be stopped or started at any time. Given the many tax advantages that are available with regard to funding a personal pension there are limits to the tax-relievable contributions that can be paid. Individuals are able to make contributions of up to the greater of £3,600 or 100% of their annual earnings to all of their pensions each tax year and receive tax relief on them.

There is an annual limit on the total amount of pension contributions that each person can make without incurring a tax charge (this includes employer and employee contributions). This is called the Annual Allowance. Where the total employer and/or individual contribution exceeds the Annual Allowance a tax charge will apply. Depending on your taxable income the excess pension savings can be charged to tax in whole or in part at 45%, 40% or 20%.

It may be possible for contributions in excess of the Annual Allowance to be paid in some circumstances under the rules which allow unused Annual Allowance from the three previous tax years to be brought forward and added to the current year’s Annual Allowance.

Past performance is not a reliable indicator of future results