Sipps (Self Invested Personal Pensions)

Sipps (Self Invested Personal Pensions) came into their own with the simplification of the pension rules in April 2006. Sipps may be used to invest in stocks and shares, government securities, unit trusts and investment trusts. Sipps may also be used for commercial property, insurance company funds, traded endowment policies, deposit accounts with banks and building societies, and National Savings products.

The important point about Sipps is that they give you complete control over your pension savings and where they are invested. You have the option of using a provider such as an execution-only stockbroker, where you make all the investment decisions. Or alternatively, you can pay someone to do the job for you, should you so wish.

Sipps fall under the same basic rules for contributions and tax relief as personal pension plans. High earners benefit most. You may invest up to £225,000 in 2007-08 to get tax relief up to 100% of earnings. You can make contributions above 100% of earnings but no tax relief is available on the excess and a charge is payable on any contributions over £225,000 in a tax year.

With payments made net of tax if, for example, you are a 22% taxpayer and invest £1,000 into a Sipp you effectively only pay £780 - the Government paying the rest. Higher rate taxpayers paying 40% will therefore effectively pay only £600 on a £1,000 investment.

Every UK resident under the age of 75 can contribute to a Sipp. You can even open a Sipp for a child without it affecting your own tax status.

If you do not have any earnings, then you can put in a maximum of £3600 gross in any tax year to gain tax relief. There is a lifetime allowance for the maximum amount payable which will be treated as tax-privileged. This is currently set at £1.6 million for 2007/08, rising to £1.8 million by 2010.

At retirement (50 at the earliest but rising to 55 from 2010) you may take up to 25% of your fund as a lump sum tax free and then make decisions about how to handle the subsequent retirement income, either as an annuity or income drawdown. You may find independent financial advice invaluable at this stage.

Worth pointing out is that if you leave the fund invested and take income from it (income drawdown) not only could it eventually erode all the investment but your heirs will be subject to a 35% tax charge should you die during the drawdown period and the assets are passed on.

From April this year Sipps - together with all other personal pensions - became fully regulated by the Financial Services Authority. This means Sipps operators and firms giving Sipps advice must be authorised.

See also: Pensions - an Introduction - Saving for retirement - Creating an income in retirement - Independent financial advice

Last Updated: November 2007 © Moneyextra.com

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