SIPPs Rules

Unlike the “do it yourself sipp” which is offered by many of the leading sipp providers having a dedicated, impartial case manager means that you, the customer, will be guided through potentially confusing sipp rules.

Protected rights funds are acquired when an investor no longer wishes to have a lower state pension. By doing this the National Insurance payments they have made will be paid back into their pension scheme and this, in addition to the growth, is known as Protected Rights. Pension rules for investors into a SIPP were changed in October 2008, scrapping the rule that people are forbidden from transferring their protected rights into a SIPP. This new ruling has therefore increased the flexibility and choice available.

How much can I invest?

In addition to increased flexibility with a sipp you can also decide how you invest; you have a choice of when you want to stop and start your payments and whether you want to make regular contributions or lump sum payments.

Payments into your sipp can be made by yourself as well as another person on your behalf, including your spouse, parent or grandparents. For tax purposes these payments are treated as personal contributions. For example if you are unemployed or have no taxable income then your spouse or parent can contribute £2,880 a year into a sipp. This payment will still receive basic rate tax relief and will become £3,600.  An employer can also make contributions to your sipp.

A sipp can be set up to receive either regular payments through direct debit or lump sum payments through electronic transfer or cheque depending on the company.

At sipps.org.uk our trusted partners offer a nationwide service, you are therefore not limited by any one insurance company and their regulations. The minimum contribution you can make for each company differs, before deciding you should seek independent advice, contact us today for a free review from one of our partnered case managers.

Payments can be made into your sipp until the age of 75 and most people are eligible to contribute their yearly earnings, for example if you earn £40,000 pa you can contribute this to your pension. This has been capped at £245,000 for the 2009/2010 tax year.

The earnings which you can base your contributions on are known as Relevant UK earnings. If you are self-employed this would be the profit that you make after tax adjustments, likewise if you are employed this would be your salary plus any taxable benefits you receive.

Taking an income

Another advantage of a sipp is that, unlike a traditional pension where you pay all or part of your fund to an insurance company to buy an annuity, it offers far more flexibility in how you draw out an income.

With a sipp you are able to take an income from the age of 50 (55 as of April 2010) provided you have sufficient funds in your pension pot.

Additionally another major advantage of a sipp is that the holder is able to draw a 25% as a tax free lump sum.

Most people are likely to use the rest of the funds to buy an annuity however it is also possible to continue to draw down and income from their pension fund, this is known as an Alternative Secured Income. Those who can afford to live on a reduced income will also be able to avoid purchasing an annuity.

Alternative Secured Pensions

Alternatively Secured Pensions (ASPs) were first introduced in 2006 and allow those over the age of 75 to avoiding purchasing an annuity. An ASP is a form of income drawdown, whereby the individual continues to invest their savings and take an income from the fund within the guideline limits. The minimum amount that can be drawn as an income is 55% and the maximum is 90%, this is set by the Government Actuaries Department, any payments that fail to comply within these limits are subject to a 40% tax charge.

Originally these rates were set at 0% at 70% for the tax year 2006/07; however after a government review these were changed. These rules were enforced to deter those who were avoiding purchasing an annuity; Alternatively Secured Pensions were primarily set up for those with strong religious or ethical objections to annuities.

If in the event any funds remain after the death of the benefactor, in contrast to income drawdown, ASPs must primarily provide for any financial dependants. After this any surplus can be passed on to a pre-elected charity with no tax liability. If no charity has been nominated the surplus can be used to enhance the benefits of other members, this can include family members.

However from the 6th of April 2007 this surplus is regarded as an unauthorised payment and is subject to a tax charge of up to 70%. This high tax rate was again introduced by the government to try and deter those from using Alternatively Secured Pensions as a way of transfer retirement benefits to family members.

If no beneficiaries or charities are named by the ASP holder before death then the pension administrator can nominate a charity of their choice.

The rules and regulations surrounding Alternatively Secured Pensions are complex and as with any financial decision independent advice should be sought. Contact us today for a free review of your finances by one of our FSA regulated partners.

Income drawdown

Income drawdown, also known as an unsecured pension, involves taking s 25% tax free lump sum off of your pension pot and leaving the remainder invested. A limited yearly income is then withdrawn rather than purchasing an annuity. However these facilities are only available to those under the age of 75; at this point an annuity must be purchased or the fund must be transferred into an Alternatively Secured Pension.

The yearly income can vary from year to year but must remain within the minimum and maximum limit; the minimum being £0 and the maximum being 120% of the calculated pension according to the government guidelines called the Government Actuaries Department (GAD). This department produces tables for those wishing to take income drawdown and they are based on the rate that your pension scheme could buy an annuity based on your life expectancy only; this does not include allowance for annual increases. Additionally because your pension fund decreases this must be recalculated every 5 years.

For those who are able to live on a reduced income, this form of drawing a pension has many advantages, for example, investors still have full control over all their investments and where these are invested can continue to be flexible. Additionally each year the income drawn can be different rather than set as with an annuity; an income does not have to be drawn annually it can also be taken half yearly, quarterly or monthly. There is also an increased range of death benefits available to those who choose income draw down over an annuity.

Increased death benefits are often classed as one of the major advantages of income draw down. These include:

  • A surviving spouse or dependants are able to take a lump sum death benefit of the remaining cash in the pension fun, minus a 35% tax charge
  • A surviving spouse of dependants can continue the income drawdown and making regular withdrawals
  • An annuity can be purchased using the remaining fund for the spouse or dependant.

As with any decision there are obviously risks involved with choosing income draw down over purchasing an annuity; an annuity guarantees a secured income and choosing an unsecured pension means you are susceptible to other contributing factors. For example delaying buying an annuity may mean that current rates are compromised and a much lower level of income may be offered later on, additionally any current investments are susceptible to any fluctuations in the market.

At sipps.org.uk one of our independent partners will use expert advice to get the right deal for you. Contact us for a free review from a dedicated case manager.