SIPP stands for self-invested personal pension and, as the name
suggests, it's a type of DIY personal pension where you pick the
investments yourself. You can think of it as being a bit like a
self-select ISA, in that it's just a wrapper into which you put
investments and, like ISAs, there is no Capital Gains Tax to pay
on profits.
The difference is that SIPPs are basically subject to the same
rules as personal pensions. They have the same limits on
contributions, the same 25% restriction on the tax-free lump sum
on retirement and the same requirement to buy an annuity by the
time you reach 75.
In the past, SIPPs tended to have fairly high, flat-fee charging
structures, meaning that they've usually only been suitable for
people with relatively large pension funds. However, the arrival
of online SIPPs, with far lower charges, has made them more
suitable for a far wider range of people.
The permitted range of investments for SIPPs include stocks and
shares on the world's major stock exchanges (and a few of the
minor ones too, including those quoted on AIM), investment
trusts, unit trusts, OEICS, gilts and even commercial property.
You can't invest in residential property at the moment, i.e.
buy-to-let, but you will be able to from April 2006, when new
pension rules take effect.
In the case of commercial property, the SIPP is actually allowed
to take a mortgage of up to 75% of the property's value. You can
then lease the property to a business that you own (on
commercial terms), or to a third party. If you're a business
owner, this can be tax-efficient since the rent comes out of the
business's pre-tax income and comes into the SIPP as tax-free
investment income. As ever, there's a catch, though, which is
that the best value SIPPs, i.e. the online SIPPs, aren't geared
up to provide this sort of thing, though that's not to say they
won't in the future.
You are permitted to contract out of SERPS if you're using a
SIPP for your pension but the SERPS money won't actually go into
your SIPP. The Government restricts you on how you can invest
SERPS money (to keep it safe) so it has to go into something
called an Appropriate Personal Pension.
So, are SIPPS a good thing? Well, you can control your own nest
egg and you can freely shop around for the annuity you want to
buy when the time comes (though you should make sure you can do
that with any pension). Interestingly, there is also the added
benefit of selling shares outside of an ISA or SIPP to realise
capital gains and then buying them back within a SIPP to collect
the tax relief on the way in.
As always, low charges and enough flexibility to meet your
current and future needs are, as usual, the key Foolish selling
points. However, investing in individual shares is more risky
than a fund such as a tracker.
Overview
The reputation of
the financial services industry has never been lower than at the
present time. Highly intelligent pension investors have had the
privilege of been charged extortionate fees whilst the “experts”
mismanage and lose their hard earned capital. Without the
ability to clearly track the losses of their depleted
investments Investors have been unable to intervene and halt the
disastrous consequences of this mismanagement.
To combat this, SIPPs are intended to provide individuals with
control over their pension arrangements. They offer personal
direct control of their investment and are a cost-effective,
tax-efficient solution to a very real problem, giving you the
ability to invest your pension fund assets in areas other than
insurance company pension funds. An individual can control their
own pension investments, gaining solid growth without the
uncertainty of stock market volatility or the worry of
under-performing funds.
Many UK residents dream of a “place in the sun” but are limited
to liquid funds, and can therefore only realise their dreams
when their pension funds mature.
Beneficial tax changes to SIPP’s (Self Invested Private Pension)
will allow fund holders to invest in overseas residential
property from 6 April 2006. The major advantage to the clients
is that the real cost of their dream can be slashed by 40%, the
benefits can be enjoyed now instead of at retirement age, and
their young family can enjoy the profitable tangible investment!
Proposed changes to self-invested personal pensions (SIPPs) will
mean that UK taxpayers will be able to control their own pension
investments and will be able to use it to purchase residential
property. The changes come into effect on April 6th 2006 but the
new rules can be taken advantage of immediately.
SIPP holders will be able to increase their purchasing power, as
the UK government will contribute up to 40% of what SIPP holders
invest. Coupled with the opportunity to borrow 50% of the value
of the SIPP, this means
that £75,000 of
purchasing power can be achieved by a client making a net (after
tax-relief) contribution of £30,000.
A new generation will now be able to realise their dream
allowing young families to enjoy this lifestyle immediately
using their pension fund. Using a SIPP they may be able to
reduce
their purchase costs by up to 40%.
The Benefits
The major advantage of establishing a SIPP for property purchase
is the tax relief afforded by the Inland Revenue. For every 78p
paid into a SIPP the government contribute an additional 22p.
Additionally, those paying the higher rate of income tax receive
an extra 18p in every £1, meaning that the government is, in
effect, contributing an additional 40% to the SIPP fund.
This means that higher-rate taxpayers will only have to fund 40
per cent of the purchase price, as the remainder will be topped
up by the government through tax relief, and via the ability to
borrow an additional 50% as detailed below. In addition, any
rental income derived from the property can be added to the
pension plan and allowed to grow tax-free. There will be no
income tax to pay on this rent, which would not be the case if
the property were owned outside of a pension scheme.
Overseas property held in a SIPP will be free of UK capital
gains tax and there will be no UK income tax on any rental
income derived from this asset. However, income tax deducted at
source in respect of dividends paid on shares held in the SIPP
will not be recoverable. Also, property owners may have to pay
local income, CGT and inheritance taxes, depending on the
country chosen, however Cyprus has an unique taxation that
hugely advantages the client’s ownership of property through
SIPPS.
A SIPP fund will be able to borrow up to 50% of the value of the
fund. For example if a SIPP fund contains £100,000 it can borrow
up to £50,000 in order to increase the amount available for
purchasing a property. Mortgage repayments can be paid back into
the SIPP as additional pension contributions over future tax
years.
Another benefit of a SIPP is that 25% of the pension fund can be
taken as a tax-free lump sum. Income tax - but not national
insurance contributions – will be payable on the pension that is
paid from the remaining fund.
There are numerous other benefits to SIPPs such as the
possibility for companies to reduce both their corporation tax
and national insurance liabilities by making contributions to a
SIPP on behalf of employees. As always, independent financial
advice should be taken before any decisions are made.
Monies within the fund cannot be drawn on until the holder
reaches 50 years old, and after 2010 this will be upped to 55
years old. On becoming eligible to draw a pension, through 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.
If you become seriously ill you may be able to draw all of the
money out of your SIPP tax-free.
Why Cyprus
Some countries, including Spain and France, do not recognize
trusts, which is effectively what a SIPP is. Cyprus, however,
has legislation in place that mirrors that of the UK, thus
allowing individuals the opportunity to purchase property via a
SIPP.
The recent negative comments regarding SIPPs in the National
Press have concentrated on these countries rather than Cyprus
and its unique position.
Cyprus also has a beneficial tax regime for residents and
retirees, which makes it exceptionally attractive:
-
No Inheritance Tax
-
Overseas Dividends and Interest exempt
-
Profit from the sale of Equities exempt from CGT
-
Profit from the sale of UK properties, including invested properties, exempt.
-
Retirement Income taxed @ 5% not at up to 40% as the UK.
-
Lump sums on retirement exempt.
-
Profits of sale of Private Companies exempt.
-
SIPP rental income exempt.
-
SIPP capital drawdown exempt.
-
Capital sums from approved funds, i.e. pensions, exempt
-
The advantages that Cyprus offers over other traditional holiday home destinations cannot be ignored.
Contributions
Contributions to a SIPP can and indeed should utilize the
taxpayer’s allowance of the current tax year ahead of the 6th
April 2006 commencement date. The taxpayer may introduce cash
into a SIPP of an amount equivalent to the client’s annual
income to a maximum of £215,000 per year (“the annual
allowance”) and £1.5 million in a lifetime. These cash
introductions are to be iincreased annually and by 2010 the
annual allowance should be £255,000 with 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.
It is also possible to consolidate several pension plans into
one SIPP, for example a SIPP can accept transfers from a
personal pension scheme, a retirement annuity pension (Section
226 pension) or an occupational pension scheme, dependant on the
client’s personal circumstances.
Frequently asked Questions about SIPPs
Who may
establish a SIPP? - SIPPs are available to employees who
are not in company schemes, to the self-employed and to
partnerships.
What are the rules regarding off-plan New Build
properties? - In principle, a SIPP holder may buy new
build, off-plan properties now, as long as completion date is
not until after 6 April 2006. Deposit and work-in-progress
payments will not be considered a residential property purchase
thus allowing purchases now of off-plan properties for SIPP
purposes.
Can I use the property myself? - Yes. The SIPP
holder can use the property, although a commercial rent would
have to be paid into the fund for the duration, hardly onerous
as the SIPP is increasing their pension fund from their holiday
costs!
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 is normally handled by a
vetted professional Property Management company. The finances
will be administered by the financial institution, acting as a
trustee.
What happens if the property is sold? - If the
property is sold, the proceeds remain within the SIPP;
withdrawals may be made within the parameters of the SIPP
scheme.
These points are the expected Revenue stance. The actual rules
are expected to be published just prior to April 2006. Any
interested parties should seek advice from an IFA as a matter of
course.
Below is an example of the savings that can be achieved by
purchasing property via a SIPP:
Purchase £75,000 Property
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