Sipping from the pension pot

Guide to Self-Invested Personal Pensions (SIPPS)
by David Emery

A SIPP is a personal pension arrangement where the member has the right to “direct” asset allocation, although the final say still rests with the trustees and the scheme administrator in accordance with the scheme rules.

The essential difference between an “insured” and a “member-directed“ arrangement is that, whereas members of the former may be able to select their own funds from a menu, they have no powers to direct asset allocation within them.

The following constitute the range of SIPP-eligible investments and activities:

• Equities listed on any Inland Revenue recognised stock exchange including FSA-authorised UK resident and non-resident Investment Trusts and equity warrants



• Depositary Interests (including Crest Depositary Interests like IRS stocks) Exchange-traded futures and options relating to stocks and shares



• Fixed-interest securities including government and corporate bonds and PIBS



• Collective investment including FSA recognised UK and EEA-resident unit trusts, oeics and UCITS



• Insurance company managed funds, unit-linked funds, policies of authorised UK and EEC insurance companies and Traded Endowment Policies



• Cash deposits held with UK-based deposit takers in any currency. Provision for investment in National Savings and Investment Bonds has been made in the 2004 Finance Bill, although NS&I is not a licensed deposit-taker.



• Commercial property (including land) in or outside the UK (including hotels and motels, guest houses, nursing homes, public houses) and ground rents.



• In-specie transfers of the above from other pensions schemes, unlike a managed fund where the transfer would normally be made in cash.



• A SIPP may borrow to purchase or develop commercial property or to defray related VAT.

A SIPP may not make loans. Borrowing is permitted without any specific limit, but must not compromise the ability to pay a pension by age 75.

Tax Regime

SIPPs are personal pensions contracts and are therefore fall under the tax regime governing all Defined Contribution (DC) personal pensions like insured PPPs and stakeholders.

SIPPs are not stakeholder pensions because their charges do not fall within the 1% annual charge limit, zero initial charge and free-transfer rules.

Contribution limits are age-related and benefits are available in the form of a tax-free lump sum (25% of the final fund) and a taxable income from an anuity or income drawdown arrangement (See the Find Guide to Annuities and Income Drawdown).

As of 6 April 2006, SIPPs will fall under the new “simplified” tax regime governing all private pensions – personal or occupational.

Managing Your SIPP

Administration and Trusteeship

In most instances, the administration and trusteeship of the SIPP are separated from the investment function and subcontracted to an outside agency like Sippdeal, European Pensions Management Limited (EPML), IPM Personal Pensions Trustees Limited and Personal Pension Management Limited (PPML)

Charges

Apart from dealing charges, the major costs are any from the following menu:

• Initial set-up fee



• Periodic admin charges



• Contribution processing



• Transfers-in from other schemes



• Transfers-out to other schemes (all except myBroker)



• Charges for setting up annuities, establishing and administering income drawdown and paying death benefits

Charges are normally liable to VAT.

Income Drawdown

The nature of the SIPP lends itself to Income Drawdown. After all, if you are predisposed towards self-directing the accumulation of your pension fund, why not your retirement income too?

You may anticipate the following charges:

• A set-up fee or an annual fee



• A separate charge for the triennial review



• A charge for administering the tax-free lump sum and death benefits

Annuity

You can expect the following kinds of charges:

• Quotation fee



• Establishment fee



• Purchase fee



• Death benefits

SIPPs and Property

Commercial property is already a SIPP-eligible asset class and residential property will become eligible from pensions simplification A-Day. Current regulations are as follows:

• The property must be purchased on the open market and must be leased on proper commercial terms and at a rent supported by an independent professional valuation. Members and connected persons must pay the full whack for using the facilities (e.g. a leisure centre)



• No asset (including commercial property) may be bought by the SIPP if a member or connected person has owned it within the last three years. Likewise, a member or connected person may not purchase any asset sold by the SIPP within the last three years



• If land is acquired by the SIPP adjacent to land owned by a member or connected person, the scheme administrator must be ensure that the properties remain separate and that no advantage accrues to the member and connected persons by reason of proximity



• SIPP borrowing must not exceed 75% of the purchase price (or the appropriate share of the value) or the cost of development. (As of 6 April 2006, this will be reduced to 50%). Borrowing may be secured on SIPP assets, but not by personal guarantee or on life policies.



• Developments, improvements and modifications of land and property (excluding maintenance) must be carried out by unconnected parties



• No new investment in commercial property may take place if the member has reached the pension date in relation to his or her SIPP arrangement, or age 65 if later.