All About SIPPs (self-invested personal pension)

Frequently asked Questions about SIPPs

Why Invest in Overseas Property?
Did you know that from April 2006, changes in UK pension legislation will enable investors to use their pension funds to purchase overseas residential property. There are many changes to UK pension legislation due in April 2006. One of the most important developments is the impending introduction of residential and overseas holiday property as an asset for investment in Self Investment Personal Pension (SIPP).

Is it possible now?
Currently, SIPPs can invest in commercial property, shares, unit trusts, cash and bonds. The new rules, however, will allow investment in residential property as well as overseas holiday properties. Investors will also have the possibility of borrowing up to 50% of their existing fund as part of the finance.

How do I use my SIPP?
As and from April 2006, changes in legislation regarding SIPPs will offer house buyers the opportunity to invest in property abroad. Cyprus 4 Properties examines the benefits and drawbacks of investing in property overseas through a SIPP.

Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. Taxation is a complex subject and what follows is a basic outline and is intended only as a general guide. Nothing herein constitutes financial advice.

What are SIPPs?
Self Invested Personal Pensions (SIPPs) emerged in 1989 as a means of investing, predominantly, in quoted securities and commercial property.

Who may establish a SIPP?
SIPPs are available to employees who are not in company schemes, to the self-employed and to partnerships.

How are SIPPs managed?
The assets are generally registered in the names of the trustees who typically consist of a financial institution and the contributor. These trustees hold the assets for the benefit of the contributor who has the final say as to which investment is most suitable. The financial institution's role is to ensure the contributor works within the parameters of the scheme.

The investment decisions are taken by the contributor, as stated above. If the SIPP includes rented properties the collection of rents and management of the properties may be handled by either the contributor, or the trustees may require estate agents to deal with this. The finances will be administered by the financial institution, acting as a trustee.

From 6 April 2006, many of the rules will change in particular allowing the SIPP holder to invest in residential property, both in the UK and abroad.

Are there costs in establishing a SIPP?
Setting up and running a SIPP can be expensive, but this depends on which SIPP provider you choose and how you run the SIPP. There are set-up charges, annual charges, fund management charges and trading charges all of which can run into thousands of pounds, making small SIPPs impractical, so professional advice is essential. Please also confirm the registration of the SIPP provider with the FSA

What are the advantages of contributing to SIPPs?
There are income tax, inheritance tax as well a multiple additional tax advantages in contributing and holding investment in a SIPP. Please again refer to your provider

What are the Income Tax Advantages?
The main advantage of contributing to SIPPs, in regard to income tax, is that money contributed to a SIPP is free of basic rate tax and will qualify for a rebate of higher rate tax, if applicable. Thus if the SIPP holder is a higher rate taxpayer, then the government is, in effect, contributing an additional 40% to the SIPP fund.

The restrictions are in regard to the lifetime limit in the year 2006-2007 will be £1.5 million and you can pay up to 100% of the salary of the SIPP holder ('the annual limit') free of income tax as noted above, subject to a maximum contributions allowance of £215,000 per year ('the annual allowance'). The SIPP holder will have to pay income tax on the difference between their salary and the annual allowance in the usual way, subject to annual exemptions. These limits are to be increased annually (£1.6m for 2007-2008). By 2010 it should be an annual allowance of £255,000 and a lifetime limit of £1.8 million. Growth within the SIPP does not count towards the annual limits but will count towards the lifetime limit.

Are there tax advantages in holding?
There are tax advantages in holding investments in a SIPP. In the UK there is a complete exemption from Capital Gains Tax and income tax within the SIPP subject to the proviso that income tax deducted at source in respect of dividends paid on shares held in the SIPP will not be recoverable. The tax position on properties owned abroad may vary and professional advice is essential.

A drawback is that you cannot get your hands on the money until you are 50 and after 2010 this will be upped to 55 years old. On becoming eligible to draw your pension, through your age (or, in certain circumstances, incapacity) the vast majority of SIPP holders will be able to draw a tax-free lump sum of at least 25% of the fund's value. The remainder will usually be drawn as income and is subject to income tax. In some cases the money can be extracted either tax free or at low rates. There are strictly defined limits on the way that you can draw income from a scheme. Broadly speaking, you can use the funds to either purchase an annuity to provide income, or you can opt to slowly draw funds, subject to various rules as to how much, from the capital of the fund, as income.

What are the Inheritance Tax ("IHT") advantages?
The payments into the SIPP are not chargeable transfers (or even potentially chargeable) as there is no reduction in the value of the holders estate. If the SIPP holder dies before any benefits are received from the pension then the money in the SIPP will pass on, free of IHT. This only works if the nomination is made in a non-binding letter of wishes, although, most trustees will almost always abide by the letter of wishes. If it is done in any binding way then IHT at 40% is payable subject to the nil rate band and other circumstances. If, on the other hand, the SIPP has gone into full drawdown, which means that the capital is being used to provide income and the trustee is under the age of 75, any remaining funds will pass to a nominated beneficiary subject to a 35% tax charge. If the SIPP fund is only in partial drawdown, the segments not designated as available to provide income can pass tax free as above.

Is it possible to buy a property through a SIPP?
From April 2006, it will be possible to use a SIPP to invest in residential property in the UK and abroad, with SIPP trustees allowed to borrow up to 50% of the fund's value. The bad news is that these rules are less favourable than those currently in force for the purchase of commercial property. Experts claim that the post 6th April 2006 borrowing power of a SIPP will be approximately one sixth of that at present.

One issue which is not clear yet is in regard to the exchange of contracts on the purchase of a property by the SIPP after 6 April 2006. In practice, though, the trustee can exchange contracts in their names, later assigning the contract to the SIPP shortly before completion. This is in fact already happening. However, you should always consult with the trustees of your SIPP before committing to any such arrangement.

It is also possible to sell privately owned property into a SIPP, provided that it is at a fair market price. However, there is a possibility of a capital gains liability.

Is it possible to live and use property bought through a SIPP?
It is not possible to buy a house in either the UK or abroad, in a SIPP and live in it without charge. There are restrictions on personal benefits received from SIPP assets resulting in a tax on the deemed amount of the benefit received by living in the house ("benefit in kind"), equivalent to the amount of the rent that the SIPP fund would be receiving if the property were let commercially.

How to withdraw money from a SIPP
Aside from the entitlement to a capital lump sum as mentioned above, there are additional options to withdraw money from SIPP funds:
Drawdown, i.e. Money simply paid from the capital in the SIPP
The purchase of an annuity.
As mentioned above, funds cannot be accessed until the holder is over 50.
If you become seriously ill you may be able to draw all of the money out of your SIPP tax-free.

By Mary Antonescu - mary@cyprus4properties.com