A self-invested personal pension (SIPP) is a type of pension called a defined-contribution pension. This means that the money you can take out of your pension is based on the amount you have put in though contributions over your working life and any investment growth on that money, or in other words, the value of your pension fund at that time. It works in a similar way to a standard personal pension but the main difference is that it offers you greater control and flexibility over where you invest.
Putting additional money and benefiting from tax relief
A SIPP benefits from the normal tax relief available to pensions. To add £100 to your pension, you pay in £80 and the taxman will add basic rate tax relief at 20%. If you pay higher or top rate tax, you can claim back the remaining tax relief through your tax return, meaning you can benefit from up to 45% tax relief.
"A £100 contribution for top rate tax payer will only cost £55, once both reclaims are received.“
Preferential tax treatment and inheritance estate planning
A SIPP is a registered pension scheme meaning that it is registered with HMRC and your investments can grow free from capital gains tax and UK income tax.
A SIPP is also set up under trust meaning that it separates the legal ownership of your pension assets from your other non-pension assets, which means the fund on your death can normally be paid to a beneficiary without incurring inheritance tax. If you die before age 75, there is generally no income tax liability on any money your beneficiaries take out of the pension they inherit, but if you die after age 75 your beneficiaries will pay income tax on any money they take out. Read more about the tax treatment of a SIPP on death here.
Flexibility in later life provision and planning
From age 55 (increasing to 57 from 2028) you can start taking money out of your pension, normally 25% of which is tax-free and the rest as income, which will be subject to income tax. The new pension freedoms introduced in 2015 have given savers more flexibility and we suggest that you read ‘Your pension: it’s time to choose’ fact sheet from the Money Advice Service.
If you are approaching 55 or thinking of accessing your pension in the near future, you are also entitled to free, impartial guidance from the government backed service called Pension Wise. You can receive Pension Wise guidance online, over the phone or face to face. Visit www.pensionwise.gov.uk or call either 0800 280 8880 or 0300 330 1003 (from outside the UK +44 20 3733 3495), if you wish to use this service.
A SIPP can invest directly in a commercial property such as a shop, office, warehouse or farm.
Commercial property is a popular investment option, particularly for business owners who can use their pension to purchase their business premises and have the rent go into their pension. Current legislation also permits the SIPP to borrow up to 50% of the net fund value in the form of a mortgage. A SIPP with a value of £200,000 could borrow up to £100,000. Rental income must be set at a commercial rate and must cover any mortgage repayments by 130% on a variable rate loan and 110% on a fixed rate loan. However you should be aware that buying a commercial property with your SIPP can be a complex transaction. Please read our ‘Commercial Property Purchase Guide’ for more information.
Modern working culture means we often accumulate many pensions across our working life. A SIPP may be a great way of consolidating multiple pension funds in one pension product so they can be managed in a more efficient and focused way.
See key information about our Modular iSIPP
SIPPs are a complex product and the above is just an overview. You can read more about the Modular iSIPP here, or by taking the opportunity to read the literature that explains in detail about the product.
Modular iPlan products are not suitable for all investors. We strongly encourage you to get financial advice before proceeding. James Hay Partnership is not authorised to give financial advice. If you do not already have a financial adviser, you can find an authorised adviser in your local area at www.unbiased.co.uk or call 0800 023 6868.
You can also get useful and impartial information about pensions, savings and investments from the Money Advice Service (www.moneyadviceservice.org.uk). If you are planning to take money out of your pension in the near future, you are entitled to free, impartial guidance from Pension Wise. Visit www.pensionwise.gov.uk or call either 0800 280 8880 or 0300 330 1003 (from outside the UK +44 20 3733 3495), if you wish to use this service.