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Sipps Pensions Exeter
 
 
 
Sipps, who should have one?
Self Invested Personal Pension
 
SIPP is short for Self Invested Personal Pension. They seem to be the buzz word in retirement planning these days, but are they the right thing for you? Self-Invested Personal Pensions offer similar tax advantages to other standard 'off the shelf' pension products offered by insurance companies. The key differences over personal and stakeholder pensions are that the investments can be bespoke for the individual investor before and post retirement to match their individual circumstances. They offer a wider range of investable assets, features and benefits making them more adaptable as you journey through life from saving for retirement to relying on your pension for income.

So who should consider having one?

In my view people will fall into one of three camps when it comes to using SIPP's as a retirement option

1. The Active Investor seeking control

Someone who has an above average understanding of the investment market may wish to have a greater control over their retirement funds. Alternatively some investors who take an active interest in investing may wish to manage the investments along with a professional adviser. Lastly you may prefer to have access to a wider range of investment types for instance, individual equities, ETFs, corporate bonds, gilts or even commercial property.

2. Any investor who wishes to use one or more of the flexible options that SIPPs provide

For some people it is the features and benefits of a SIPP rather than the investment control that makes a Self-Invested Personal Pension attractive. Without going into the full list and all the pros and cons, some of the features are:

  • Commercial Property, is a common reason to use a SIPP, the biggest beneficiaries are those that rent a business premises. Buying your own business premises means that the rent, instead of being paid a landlord is paid to your pension. Additionally you can borrow up to 50% of the equity in the plan to purchase a commercial property. This gearing can be positive, however over exposure to one asset also brings risks as we have seen with the 2008 commercial property downturn. Investors seeking income from SIPPs containing property should be aware that the rent from property in the plan has no direct bearing on the income you can take from the SIPP.

  • Improved Death benefits over standard annuities, see Pensions as an inheritance tax tool.

  • Spouse/Civil Partner can take a pension income from the whole fund value subject to their personal circumstances as an alternative to taking a lump sum on the death of the policy holder.

  • Avoiding annuity purchase during period of low annuity rates. Though care should be taken with this as it is difficult the predict annuity rate movements, your changing health and life expectancy.

  • The ability to take a tax free lump sum without taking an income. This is useful if you need some capital now, but don't want an income.

Pension Fund Withdrawal, allows investors to keep their money invested in retirement whilst drawing an income from their pension. Keeping the capital invested can be useful for people retiring early or those with a younger spouse or civil partner. We would remind investors that any income taken from a Flexible drawdown plan will affect its ability to increase in capital value.

  • Phased Pension Fund Withdrawal, which is about starting pension income in tranches over a number of years. This is beneficial for people wanting to reduce working hours in the run up to full retirement. Income is predominantly generated from Tax Free Cash in early years, which helps avoid an increased income tax liability.

  • Uncrystallised Pension Lump sum [UFPLS], which allow investors to withdraw a lump sum after age 55, made up from part tax free cash [25%] and part income [75%], without having to crystallise the whole pension fund. This will give access to some of your pension leaving the rest intact to grow. Some providers even allow a regular monthly UFPLS withdrawal which helps control income tax and or leaves the option of a Pension Cash Lump Sum [tax free cash] at full retirement.

  • Flexible Pension Fund Withdrawal allows investors to withdraw unlimited amount of capital or income from their SIPP; however capital withdrawn over and above the Tax Free Cash allowance is subject to income tax in the year that it is taken. Income can be stopped or started to suit tax and income planning. Some people may seek an income when retiring early and them reduce or stop the pension income when they start receiving their state pension. Investors are advised that they should not cause themselves to become dependent on the state as they may lose entitlement to some benefits.

  • Estate planning; death benefits of a SIPP Pension Fund Withdrawal Plan make it possible to do some Inheritance Tax planning with the lump sum death benefits. This is a complex area as there are numerous permutations determining the lump sum payable on death without considering market fluctuations. The merits of using SIPPs for estate planning should be considered on a case by case basis. Continued changes in Pension and Estate planning rules make this an area that should be approached with care as future changes may have an adverse effect.

All of these features have their own benefits and problems to consider. Investors are advised to seek advice to ensure they fully understand how these features interact with their circumstances including their willingness and ability to accept investment risk in retirement.

3. Lastly when a SIPP is not a good idea

If the advantages above are not of any benefit to you, then a SIPP may not be a suitable alternative to a good personal pension plan or even stakeholder pension. If you do not want to be actively involved or would not consider the use of to be actively involved or would not consider the use of wider investments available you should look at a personal or stakeholder pension. Today, many of the pensions in the market offer good choice of funds where you can create a balanced portfolio of investments to meet your investment risk profile at lower costs than a SIPP.

Warnings

All pensions, whether a Stakeholder, Personal or Self Invested are investment wrappers that help shield investors from UK tax. The performances of the investments inside the pension plan determine the overall outcome of your pension planning. Investors are advised to build a balance portfolio inside their pension and should consider regular investment reviews to ensure the plan is still working for them. Taking an income from any investment reduces its ability to grow. A poor investment strategy in retirement could affect your standard of living. We recommend that if you are seeking an income from your pension that you read our Drawdown Investment Strategy article and seek advice from a qualified Investment Specialist.

Contact us if you would like to work with an investment adviser to manage your retirement plans.

 
 
 
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