SIPPs

SIPPs

Self-Invested Personal Pension

All of Emerald Knight’s investment projects are SIPP compatible, providing you as an investor the opportunity to earn even more from working with us. However, if you are unfamiliar with how these investment vehicles work, we have put together a short guide to set out the basic principles.

The Self-Invested Personal Pension, or SIPP, is the name given to a specific type of investment which has been examined and approved by the UK government as a pension scheme. It allows individuals to make their own investment decisions form a list of HM Revenue and Customs (HMRC) approved investments.

While SIPPs are a type of Personal Pension Plan, and are allowed similar tax rebates on contributions in exchange for limits on accessibility. However, under HMRC rules, SIPPs are allowed to hold a greater range of investments than Personal Pension Plans, notably equities and property.

Investment choice

Investors make choices about the purchase and disposal of the specific assets within the SIPP, subject to the approval of the SIPP trustees, who are usually the SIPP provider. All assets are permitted by HMRC under SIPP regulation, however some are subject to heavy tax penalties. Assets which do not attract a tax charge are:

• Stocks and shares listed on recognised exchanges
• Futures and options traded on recognised exchanges
• Authorised UK unit trusts
• Unauthorised unit trusts which do not invest in residential property
• Unlisted shares
• Investment trusts under FSA regulation
• Unitised insurance funds from EU insurers
• Deposits and deposit interests
• Commercial property – including hotel rooms
• Ground rents containing no element of residential property
• Traded endowment policies
• Derivatives products
• Gold bullion

Other investments which are allowed but which do incur a heavy tax penalty include:

• Tangible moveable property which does not exceed £6,000 in market value
• Other exotic assets such as vintage cars, wine, art, collectibles
• Residential property

SIPP Types

Unlike conventional pensions, SIPPs members are allowed to have ownership of the assets in the scheme, so long as the scheme administrator is a co-trustee to exercise control over the assets. The role of the administrator is to control what is happening and to ensure that the scheme requirements for tax approval continue to be met.

There are generally seen to be three types of SIPP scheme:

• Deferred – This is essentially a Personal Pension Plan in which the majority of the pension assets are held in insured pension funds. Self-investment activity or income withdrawal is usually deferred until a future, indeterminate date.
• Hybrid – This is where some of the scheme assets are held in traditional insured pension funds, with the remainder being ‘self-invested’. Many mainstream personal pension providers commonly offer this option now.
• Pure or Full – Unrestricted access to the many investment asset classes allowed.

Tax situation

Contributions to SIPPs are treated in the same way as they are to other types of personal pension – limited to £2,880 or 100 per cent of earned income up to a maximum of £255,000 for the 2010-2011 tax year. The SIPP provider then claims a tax refund at the standard rate (currently 20 per cent). Higher rate taxpayers must claim for additional tax refunds through their tax return.

Income from assets within the scheme is untaxed and growth is free from capital gains tax.

At any time after the age of 55, the SIPP holder may elect to take a pension from some or all of their fund. After taking up to 25 per cent as a tax-free lump sum, the remainder is moved into DrawDown or an Annuity is purchased. Income earned by taking money from DrawDown or an Annuity is taxed as if it is earned in any other way.

Rules are in place to stop the tax-free lump sum being reinvested into the SIPP and should the fund value exceed the ‘lifetime allowance’ of £1.8 million (for the 2010-2011 tax year) at retirement, the additional money is taxed at 55 per cent.

SIPPs can also borrow up to 50 per cent of their value to invest in any assets, which is usually only permitted by the trustees for the purpose of investing in commercial real estate.