Self Invested Personal Pension (SIPP) Q&A

What is a Sipp?

A Self-Invested Personal Pension could be described as a collection of pension products, organised by the individual instead of a company, that allows the management of a wide-variety of investments for retirement.

What are the tax advantages of Sipps?

Self Invested Personal Pensions (SIPPS) benefit from the same tax advantages as traditional pension schemes. All contributions up the age-related limits attract tax relief of between 23% (for lower earners) to 40% (for higher earners), dependent on earnings. Upon reaching retirement, investors would have the same options as they do with an traditional pensions.

What benefit do Sipps have over traditional pensions?

The key advantages are:

Money invested in Self Invested Personal Pensions (SIPPS) attract income tax relief from 22% for basic rate tax payer up to 40% for investors on the higher rate
Profits from the sale of the property are exempt from capital gains tax
The SIPP pension pays no income tax on rental income (SIPP Buy-to-let)
Property held in pension trusts is not generally liable to inheritance tax
More flexible than traditional pension policies

How are the rules governing Sipps changing next year?

As from April 6th 2006, changes will be made to the legislation governing Self Invested Personal Pensions. There are quite marked differences between what is applicable now and what you will be able to invest in post April 6th.

The Inland Revenue currently allows a fairly wide range of investments which can be included in a SIPP including

Cash
Gilts
Bonds
Collective Investments (ie Unit Trusts)
Equities
Commercial Property
Contracts for Difference

Legislation being introduced on the 6th of April 2006 will allow investors further expand what they can invest in their Self Invested Personal Pension (SIPP). Investors can put in a maximum of their annual salary, up to £215,000, with a lifetime limit of £1.5 million. They can also include the following into their Self Invested Personal Pension:

Residential Property (Both UK based and Abroad, including your own home)
Unlisted Securities
Gold
Fine Wine
Antiques

What are the rules regarding investing in residential property?

The Government will not be publishing the full rules until the autumn but from what has been said so far, investors will only be able to purchase a property within a Sipp using funds that are already in the pension and borrowings of up to 50 per cent of the value of those funds. In effect, this means that an investor who has £100,000 in a Sipp will be able to part-fund the purchase of a property costing £150,000.

It has also been indicated that existing buy-to-let landlords will be allowed, subject to the contribution limits, to transfer their properties into a Sipp. But because the pension fund is effectively buying the property, they may be liable to pay capital gains tax. In theory, Sipp-holders will also be able to transfer in their own homes, but the benefits of doing are likely to be negligible because of the capital gain tax rules.

All residential property transferred to, or bought within, a Sipp will be owned by the fund and must be managed by a trustee. The income and expenses arising from the property are handled and accounted for by the trustee.

What are the advantages of putting residential property into a Sipp?

Money invested in a Sipp attracts tax relief of 22 per cent for basic-rate taxpayers and 40 per cent for those on the higher rate. This means that a £100,000 property bought in a Sipp would, in effect, only cost a higher-rate taxpayer £60,000 becasue they would be paying £40,000 less in tax.

Another advantage is that rental income accumulates tax-free. There is also no capital gains tax on any profits when the property is sold.

What are the potential pitfalls?

Property is an illiquid investment. To get money out of property, you will need to sell or take a mortgage out on it. Both may prove difficult
Sipp-holders can only withdraw the benefits from the fund when they reach 50 or older, so it might not be suitable for buy-to-let investors with a shorter-term horizon.
Where you invest in a single property, this is a risky investment. Your money is tied up in one asset, rather than being spread in a number of different assets

Self Invested Personal Pensions (SIPPS) are a complicated product with many varied rules and regulations, and professional advice should be sought at all times before investing.