How SIPPs Work
The simplest way to understand how a SIPP works is to think of it as a flexible personal pension but with special investment facilities. SIPPs follow the same tax rules as personal pensions and stakeholder schemes. You can invest between 17.5 and 40 per cent of annual earnings each tax year, depending on your age.
At retirement you can take up to 25% of the fund as tax-free cash and use the rest to buy one of the many annuities available to provide taxable lifetime income.
Alternatively, you could defer the annuity purchase up to the age of 75 and, in the meantime, draw an income within certain limits directly from your fund. This is known as Income Drawdown.
Investment Possibilities
SIPPs offer access to a wide range of investments in addition to the collective funds available to personal pensions and stakeholder schemes. The choice includes individual equities and bonds, traded endowment policies, warrants and convertibles. You can also invest in commercial property, including new business premises for your firm, hotels, motels, nursing homes, guesthouses and pubs. From A Day (6 April 2006), residential property and antiques are some of the new available investment options.
Sipps-Pensions.co.uk General Disclaimer
An increasing number of investors are using SIPPs in the run-up to retirement to consolidate under one roof the various pension plans they have accumulated over the course of their career. Once you are 50, you can draw a retirement income directly from your fund, while keeping the rest of the assets fully invested. The drawdown facility may be already built into the SIPP, so you may not have to transfer to a separate drawdown plan.
The Role of the SIPP Provider (administrator)
The SIPP provider will usually set up the SIPP under a Master Trust and fulfil the role of ‘professional trustee’. The main concern of the provider and trustee are that the rules are adhered to and that they are not involved with individual investment decisions.
SIPPs are set up under Trust to make certain that the funds are only used in accordance with the legislation governing pensions. The legislation stipulates where the pension can be invested and how and when benefits can be taken.
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