Self-invested personal pension

A Self-Invested Personal Pension (SIPP) is the name given to the type of UK government-approved personal pension scheme, which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue and Customs (HMRC).

SIPPs are a type of Personal Pension Plan. Another subset of this type of pension is the Stakeholder Pension Plan. SIPPs, in common with personal pension schemes, are tax "wrappers", allowing tax rebates on contributions in exchange for limits on accessibility. The HMRC rules allow for a greater range of investments to be held than Personal Pension Plans, notably equities and property. Rules for contributions, benefit withdrawal etc. are the same as for other personal pension schemes.

Investment choice

Investors may make choices about what assets are bought, leased or sold, and decide when those assets are acquired or disposed of, subject to the agreement of the SIPP trustees (usually the SIPP provider).

All assets are permitted by HMRC, however some will be subject to tax charges. The assets that are not subject to a tax charge are: 

• Stocks and shares listed on a recognised exchange
• Futures and options traded on recognised futures exchange
• Validated carbon credits (VCS & Gold standard)
• Authorised UK unit trusts and OEICs and other UCITS funds
• Unauthorised unit trusts that do not invest in residential property
• Unlisted Shares
• Investment trusts subject to FSA regulation
• Unitised insurance funds from EU insurers and IPAs
• Deposits and deposit interests
• Commercial property (inc. hotel rooms)
• Ground rents (as long as they do not contain any element of residential property)
• Traded endowments policies
• Derivatives products such as a Contract for difference (CFD)
• Gold bullion, which is specifically allowed for in legislation

Investments currently permitted by primary legislation but subsequently made subject to heavy tax penalties (and therefore typically not allowed by SIPP providers) include : 

• Any item of tangible moveable property (whose market value does not exceed £6,000) – subject to further conditions on use of property
• "Exotic" assets like vintage cars, wine, stamps, and art
• Residential property

History

The rules and conditions for a broader range of investments were originally set out in Joint Office Memorandum 101 issued by the Inland Revenue in 1989. The Finance Act 2004 implemented wide-ranging changes to the UK pensions regime, most of which came into force on 6 April 2006 (also known as A-Day). The legislation is commonly referred to as pension simplification. SIPPs appear to be gaining in popularity amongst UK investors, with Standard Life reporting a 38% increase during the first half of 2011.

Structure

Unlike conventional personal pensions where the provider as trustee has ownership and control of the assets, in a SIPP the member may have ownership of the assets (via an individual trust) as long as the scheme administrator is a co-trustee to exercise control. In practice, most SIPPs do not work this way and simply have the provider as SIPP trustee. The first mainstream provider of SIPPs adopting this approach was James Hay Partnership who offered their own SIPP as well as performing the trustee administration for various insurance companies in the late 90s and early 2000. Sippdeal launched the first online SIPP in October 2000.

The role of the scheme administrator in this situation is to control what is happening and to ensure that the requirements for tax approval continue to be met.

The pensions industry has gravitated towards four industry terms to describe generic SIPP types:

1. Deferred. This is effectively a Personal Pension Plan in which most or all of the pension assets are generally held in insured pension funds (although some providers will offer direct access to mutual funds). Self-investment or income withdrawal activity is deferred until an indeterminate date, and this gives rise to the name. In some newer schemes of this type, there are over 1,000 fund options, so they are not as restrictive as they once were.
2. Hybrid. A scheme in which some of the assets must always be held in conventional insured pension funds, with the rest being able to be 'self-invested'. This has been a common offering from mainstream personal pension providers, who require insured funds in order to derive their product charges.
3. Pure or Full. Schemes offer unrestricted access to many allowable investment asset classes.
4. SIPP Lite or Single Investment. A recent trend towards schemes that feature much lower fees for investments that are typically placed in only one main asset. For these purposes, an investment platform or a Stockbroker / Discretionary Fund Manager account usually is classed as a single investment. An upgrade to full SIPP in the future may be allowed, depending on the scheme.

Tax treatment

Contributions to SIPPs are treated identically to contributions to other types of personal pension. Contributions are limited to £3,600 (£2,880 before 20% tax refund) or 100% of earned income (if higher). The maximum was £255,000 for the 2010/11 tax year but the 'Annual Allowance' for all pension contributions is currently £50,000 (tax years 2012/13 and 2013/14) and will be decreased to £40,000 starting with the 2014/15 tax year. The SIPP provider claims a tax refund at the basic rate (20% in tax year 2012/13) on behalf of the customer (i.e. you pay £2,880 and your fund contribution for the year will become £3,600). The 20% is added to the 'pot' some 2–6 weeks after your payment is made. Higher rate and additional rate taxpayers must claim any additional tax refund through their tax return if they have one, or by otherwise contacting HMRC (neither being a higher rate taxpayer, or having paid too much tax, are triggers for being requested to complete a tax return). Employer contributions are usually allowable against corporation or income tax.

Income from assets within the scheme is untaxed (although it is not possible to reclaim UK Dividend Tax). Growth is free from capital gains tax (CGT).

At any time after the SIPP holder reaches early retirement age (55 from April 2010) they may elect to take a pension from some or all of their fund. After taking up to 25% (as of 2013) as tax-free Pension Commencement 'lump sum' the remaining money must either be moved into 'drawdown' (where it remains invested) or used to purchase an annuity. Drawdown income is typically limited to that obtainable with an annuity according to the Government Actuary's Department (GAD). This is reviewed every 3 years until age 75 and annually thereafter. This limit does not apply to plan holders who can show that they have arrangements in place to provide a minimum guaranteed income from other sources (£20,000 in 2012/2013) and who are no longer contributing to a pension. Pension income is taxed 'as if' earned income at the member's highest marginal rate .

Rules exist to prevent the Pension Commencement 'lump sum' being 'recycled' back into the SIPP (and neither drawdown nor annuity payments count as 'earned income' for the purpose of making SIPP contributions).

If the fund value exceeds the 'Lifetime Allowance' of £1.8 million (tax years 2010/11 and 2011/12) at retirement, then the amount above £1.8 million will be taxed at 55%. From April 2012 the Lifetime Allowance fell to £1.5 million but there are provisions for those previously relying on the higher limit. In the Chancellor's 2012 Autumn Statement, it was confirmed that the Lifetime Allowance will fall further, to £1.25 million from 6th April 2014 (again with the option of certain individuals being able to claim the previous level of Lifetime Allowance).

SIPPs can borrow up to 50% of the net value of the pension fund to invest in any assets. This can include commercial property or intellectual property (IP) particularly when used for pension-led funding.

External links

• "Self Invested Personal Pension (SIPP)". The Pensions Advisory Service (TPAS).
• "Self-invested personal pensions". Money Advice Service.
• "SIPPs". Association of Member-Directed Pension Schemes (AMPS).