Self Invested Personal Pensions
Self-Invested Personal Pensions (SIPP)
Self-invested personal pensions (SIPPs) are a type of personal pension. They are an individual contract between you and the pension provider. However, SIPPs offer much wider investment powers than are generally available for personal pensions and group personal pensions.
The wider investment powers can allow you to invest in a wide range of assets, including:
Quoted UK and overseas stocks and shares
Collective investments (such as OEICs and unit trusts)
Property and land (but not most residential property) insurance bonds.
A SIPP can also borrow money to purchase some investments. For example, a SIPP can raise a mortgage to part-fund the purchase of a property. Such properties would normally then be rented out and the rental income, received by the SIPP, can be used towards servicing the mortgage repayments and the costs of running the property.
Not all SIPPs allow you to invest in the full range of allowable investments. SIPPs that hold specialist investments (such as property) may be liable to pay higher charges than schemes that hold ‘mainstream’ investments.
SIPPs are flexible and are portable. If you change jobs, or stop working, you can continue contributing to the scheme, and, if you join a new employer, they may also decide to contribute to it. If you do change jobs, you should let the pension provider know to ensure that your contributions continue (especially if your old employer was paying contributions on your behalf).
Pensions are a long-term investment. You may get back less than you put in. Pensions can be and are subject to tax and regulatory change therefore the tax treatment of pension benefits can and may change in the future.
Your Retirement Options
From age 55, there are a number of options available to you including:
Draw your benefits available from the existing provider.
Purchase an annuity with a different provider on the Open Market. This could potentially increase the payments to you.
Move to Flexi-access Drawdown (or Third Way Plan)
Use the Uncrystallised Fund Pension Lump Sum (UFPLS) rules
Move to Phased retirement
Move to a combination of the above
Draw your benefits from your current scheme
Pension arrangements can usually provide an immediate Tax-Free Cash (TFC) sum of 25% with the remaining fund generating an income which is subject to income tax.
Purchase an annuity with a different provider on the Open Market
Often taking the funds from the existing provider and shopping around on the open market can considerably increase the level of your income. This is because some providers offer better rates than others.
Buying an annuity
It’s well worth planning ahead when you decide to buy an annuity – it can take time to gather the necessary information, find the right annuity provider and set up the annuity that you want.
Where to start
Assuming you can take your benefits, the first step is to inform your pension provider or scheme administrator that you would like to start drawing your retirement benefits. In many cases, they will have written to you beforehand to ask you when you want to start drawing a pension. Your provider should then provide you with a valuation for your pension pot. They will also probably provide you with a quote for an annuity if you purchase it from them. Annuity rates can vary significantly between different providers. Shopping around is normally called the open market option (OMO).
If your pension scheme includes a guaranteed annuity rate, (particularly if it is an older policy), this could be very valuable as the annuity rate offered could be higher than those you may be offered by annuity providers on the open market.
You can check with your pension scheme or provider, but they should tell you if you have a guaranteed annuity rate. You should also check any quote that you receive includes all of the options that you want. For example, if you decide to take a tax-free cash sum, less money will be available for annuity purchase, so the amount of annuity income you receive will be lower. Transferring pension pots can take some time so, you will need to allow for this extra time in the process.
Flexi-access Drawdown (FAD)
Under the option of FAD you can choose to immediately take 25% tax free cash from your plan. Instead of buying an annuity with the remainder of the fund, the money remains invested and can continue to benefit from investment performance in a tax-efficient environment. There will be no limit on the income taken.
After you have taken your entitlement to the tax-free lump sum at outset, you can choose to take as much or as little of the remaining pot as you wish and it will be added to any other income you have in that tax year to determine the income tax rate that will apply. Please note that if you draw any income from this plan, your future money purchase pension contributions will be limited to a £4,000 maximum Annual Allowance.
As the rest of your pension fund remains invested in a tax-efficient environment, your final pension - and the income you may withdraw each year - will be determined by the continued investment management of your funds. Careful attention, therefore, needs to be given to investment management whilst in Flexi-access Drawdown to try to ensure that your income can continue for as long as possible and, if you do finally buy an annuity, you would be in a similar situation to that if you had bought an annuity at the start.
You are able to vary your income each year and the level of income you choose to take will have an effect on the value of your invested fund which will influence both future levels of income as well as the amount of any annuity income you may choose to buy.
Whilst in the short term many clients wish to consider drawing large amounts of income from their funds, in the medium to long term, it is important that you balance your income requirements with the investment policy to ensure the annuity purchasing power of your pension fund is maintained.
With this type of contract (together with the Uncrystallised Funds Pension Lump Sum option shown below):
(1) The capital value of the fund may be eroded;
(2) Investment returns may be lower than expected;
(3) Annuity or scheme pension rates may be lower in the future;
(4) When large amounts of income are taken or the maximum short-term annuity is purchased, high levels of income may not be sustainable.
(5) Means tested benefits may be affected.
Draw your benefits as an UFPLS payment from your current scheme
Your current pension arrangement could provide you with multiple or a one-off lump sum. 25% of this would be tax free, the remaining pot initially taxed at emergency rate then falling to marginal rate in the future. There is no limit on the size of the lump sum you chose to draw. Please note that this type of payment will limit any future money purchase pension contributions to a £4,000 maximum Annual Allowance.
If your pension scheme includes a guaranteed annuity rate, (particularly if it is an older policy), this could be very valuable as the annuity rate offered could be higher than those you may be offered by annuity providers on the open market. You can check with your pension scheme or provider, but they should tell you if you have a guaranteed annuity rate. You should also check any quote that you receive includes all of the options that you want. For example, if you decide to take a tax-free cash sum, less money will be available for annuity purchase, so the amount of annuity income you receive will be lower. Transferring pension pots can take some time so, you will need to allow for this extra time in the process.
The value of pensions and investments can fall as well as rise and you may get back less than you invested.
Providers do have a minimum amount they will consider so check when you obtain a quote from them. You should shop around for comparisons as the income levels may vary.
If you have suffered from a major ailment (heart attack, stroke, cancer) or you take regular medication, then you should check to see if an enhanced annuity pension is available.
Once you purchase an annuity, you cannot currently change your mind.
If you do not choose an indexed annuity, then your income may not maintain its spending power, depending on inflation.
Withdrawals from a drawdown product will produce 25% tax-free, with the remainder taxed as earned income. Your overall tax liability may be affected.
Funds drawn and invested in other savings may not receive the same tax concessions as pension funds.
Any funds remaining will continue to be invested and the value will be subject to market fluctuations and ongoing charges. The management of ongoing investments may incur additional charges.