Self-Invested Personal Pensions

Your questions answered

It’s not something we usually contemplate during our working lives, but many of us could spend almost a third of our life in retirement. Even if your retirement isn’t on the near horizon it’s never too early to start planning. A pension is one of the most effective ways to save for your future because of the tax benefits they offer.

Changes to the pension rules in April 2006 (known as ‘A-Day’) enabled individuals to invest higher contribution levels and made it easier to set up a Self-Invested Personal Pension (SIPP), a tax-efficient wrapper into which you can put a range of investments chosen by you to achieve your future personal financial goals.

SIPPs are personal pensions which allow more sophisticated investors to choose where you want your retirement savings to be invested, instead of leaving a pension company to make the decisions. You can hold a wide variety of investments in a SIPP, from investment funds and shares to commercial property and futures and options. When you reach retirement, you can take an income direct from your pension fund, in the form of a so-called ‘unsecured pension,’ which may give you greater control over how and when you take income from your fund. SIPPs share the same benefits as personal and stakeholder pensions. They enjoy tax relief at either basic or higher rate tax, your contributions will accumulate and from the age of 50 (or 55 after 2010) you can claim a tax-free lump sum and income from your SIPP. The tax treatment will depend on your individual circumstances and may be subject to change in the future.

Q: Who can take out a SIPP?
A: You can take out a SIPP even if you are already contributing to another pension, such as an occupational (company) pension scheme, providing you don’t exceed the maximum pension contribution limits. But it is important to be sure that you are really going to make use of the investment freedom a SIPP offers and that it makes financial sense for you to do so as some SIPPs could be more expensive than other types of pensions.

Q: How much can I contribute to a SIPP?
A: It is generally recommended that you should have an existing pension fund of around £50,000 to transfer or invest lump sums of several thousand pounds a year.
Since April 2006, the maximum amount that you can contribute to your pension each year and qualify for tax relief is the equivalent of 100 per cent of your taxable earnings (called net relevant earnings), subject to an annual limit of £235,000 and an overall lifetime limit for your pension pot of £1.65m. (These are the limits for the tax year 2008/09 and will be increased in future tax years).

A reason why people may wish to consider transferring their previous pension policies into a SIPP is to consolidate their retirement savings in one place and thereby benefiting from easier administration and the possibility of more cost-effective charges.

Q: What investments can I include in a SIPP?
A: These are the main investments permitted, that can be included in a SIPP: