Self-Invested Personal Pensions (SIPPs)

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 a policyholder can change the investments and investment managers making up the pension, when they wish, without incurring the expense of changing the provider of the actual policy, i.e. they can hold a pension with a company but use various investment funds from different providers to spread the risk.

There is also greater flexibility in the benefits which can be taken during retirement, without necessarily having to transfer funds again, and it can be used to purchase an annuity if that is what is wanted.

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, or can remain where they are.

Policyholders can elect to purchase an annuity or follow the route of phased retirement and/or drawdown, with there being no upper age limit at which benefits must be taken. SIPPs can also be used to purchase commercial property, albeit this can involve considerable costs.

Most types of conventional investments are freely permitted for use within a SIPP, 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, art and antiques.

To be eligible to invest in a SIPP and receive tax relief on personal contributions, an individual investor must be under 75 years of age, and resident in the UK, although there are some exemptions for individuals who work for the UK Government or have left the UK in the last few years.

Contributions can be made by the policyholder, their employer or a third party, and it can stand on its own or be part of a group pension arrangement. Minimum contributions 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 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.