Self Invested Personal Pensions
| Money : Back To Basics Most of us realise that the State will not take care of us when we reach retirement. Unless we do something about it ourselves we may find, that in retirement, we have insufficient financial resources to do the things we want to do. For many people personal pensions plans are a very tax effective way of making provision for retirement. Both a tax free lump sum and an income, payable for life, are available. In addition, in the event of your death prior to retirement a lump sum death benefit and an income for a surviving spouse or dependent can be provided. The vast majority of people plan for retirement with personal pensions provided by Insurance Companies, Banks, Building Societies and Unit or Investment Trust Groups. A growing minority however, perhaps disillusioned by tales of high charges and under performing investment funds are seeking an alternative. This may be because the press seems to be full of stories about inappropriate advice and "misselling" of conventional personal pension plans. A Self Invested Personal Pension (SIPP) offers an attractive alternative. As its title suggests it is you, the owner of the plan (together with your appointed advisers), who makes the investment decisions rather than this being left to the product provider. Some product providers will argue that they offer a degree of investment choice and control perhaps by offering a range of investment funds and switching and redirection facilities between those funds. Some even allow you to invest your contributions in funds managed by other fund managers, called external fund links. True control however, can only be achieved when you can select the underlying assets of these funds and choose when these assets are bought and sold. Conventional personal pension plan products cannot offer this degree of control. For many years the financial services sector has operated in a more open environment than was previously the case. A regime generally known as 'disclosure' has been in place since January 1995 which means that the consumer has been able to see exactly how much of their personal pension plan contributions have been taken in charges and the effect of these charges on the ultimate value of their plan. Many plan holders have become disillusioned by the amount of charges extracted by plan providers and have wished for (or demanded) a more fair and open charging structure. Since the introduction of Stakeholder pension plans in April 2001, the price of personal pension plans has been driven down. However, if it is control and transparency you are seeking then to a great extent SIPPs provide just that. There are a growing number of SIPP providers including some of the conventional product providers mentioned earlier. You can buy your SIPP directly from them or seek the assistance of an Independent Financial Adviser such as Informed Choice Ltd who will be able to assist you with this task. How does a SIPP work?If you invest in a conventional personal pension plan you make a decision about how much you wish to invest, hand this money over to the product provider and they take care of your money from that point on. You may have some involvement in the selection of the overall investment fund or funds into which your money is invested but you have no active control. In the future you might even switch between available fund links or even redirect future contributions. When the time comes the product provider will pay out the plan proceeds typically in the form of a tax free cash lump sum and an income for the rest of your life. With a SIPP, if you wish, you make the day to day investment decisions. Do remember however, that a SIPP is simply a personal pension plan but offering you much greater and wider investment control. At some point in the future you will have to take benefits from the SIPP in the same way that you would from a conventional personal pension plan. What next for SIPPs?Gordon Brown may have shattered some SIPP dreams for property investors in December 2005, but the appeal of SIPPs under the new simplified pension regime introduced in April 2006 is still likely to be significant. The aim of the simplification regime is to encourage greater pension provision by individuals. As soon as the Government believes that any abuse of this system is taking place they will take steps to shut it down. We have already witnessed pre-emptive strikes to stop tax abuse when it comes to residential property and other investment assets that could, potentially, indirectly benefit the investor. Commercial property is still a legitimate and acceptable asset for a SIPP. Post A-day the appeal of commercial property investment within a pension could actually increase. This is despite the intended reduction (in many cases) of pension property borrowing limits post A-day. Being restricted to 50% of the value of the pension fund as a maximum borrowing figure will create financing problems for some investors who were planning to pile their retirement funds into the bricks and mortar that would provide a home for their business. The ability to make bigger pension contributions (and receive tax relief on these up to prescribed levels) will, however, counteract these borrowing restrictions to a certain degree. Yes, it will mean less gearing and more personal investment required to make the transaction a reality, but this will not stop those investors who have a genuine reason to buy a commercial property with their SIPP. The removal of connected parties rules will also open up the commercial property SIPP market. Many business owners, particularly sole traders, are in the current position of owning their own business premises. This can often by bad news when it comes to estate planning. Post A-day it should be possible for an individual to borrow money via a short-term bridging loan that they can then use as a large single pension contribution. They will get tax relief on this contribution and the pension fund could then be used to buy the property from the individual. This will release enough capital from the pension fund to repay the bridging loan and result in the commercial property being held within a tax efficient wrapper. The biggest change remaining (until the Chancellor removes this as an investment opportunity as well!) is the use of SIPPs to invest in unlisted shares post A-day. It simply isn't possible under existing rules and this is probably the most significant difference to the new investment rules now that residential property, fine wine and works of art are no longer part of the game plan. As a SIPP is not an "occupational pension scheme" under the Finance Act 2004 definitions it will be possible post A-day for an investor to use their entire SIPP fund to invest in the shares of the sponsoring employer. This is where the risks involved with SIPP investments get much greater. An established family business with a proven track record is a very different proposition from an ambitious start-up entity. The greatest potential when it comes to SIPPs post A-day is for basic consolidation of existing pension assets. There is likely to be a great deal of interest from people who want to consolidate a number of existing pension plans into one pension arrangement. Busy people often want less paperwork to deal with and one annual statement can seem more appealing than four (or often more!). With the harmonisation of pension benefit rules it may be easier to consolidate your existing pensions without losing important benefits. This is certainly an area where you should seek professional independent financial advice before making a decision. Disclaimer: This publication is provided for general consideration only and the information contained herein is not to be acted upon without professional independent financial advice. Neither Informed Choice Ltd nor any author can accept responsibility for any loss occasioned to any person no matter howsoever caused or arising as a result of or in consequence of action taken or refrained from in reliance of the contents hereof. Informed Choice Ltd are independent financial advisers and is authorised and regulated by the Financial Services Authority. Martin Bamford APFS AIFP Director Informed Choice Ltd Martin Bamford is a director at Independent Financial Adviser Informed Choice Ltd. For more information about our services please visit www.informedchoice.ltd.uk or email hello@icl-ifa.co.uk to request a new client welcome pack.
 Questions about Self Invested Personal Pensions:
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