7 New Tips for Selecting and Investing in UK SIPPs
"If you want something done right, then do it yourself." Many of us take pride in performing tasks ourselves, rather than hiring someone else to complete them. Instead of paying someone to water our plants, walk our dogs, clean our rooms, repair our automobiles, install our software, wash our clothes, babysit our children and calculate our income taxes, we can do all of the tasks ourselves. While this involves more legwork, we can take all the credit (and if necessary, blame) regarding the results of the labor.
Likewise, Self-Invested Personal Pensions (SIPPs) are a type of Do-It-Yourself pensions that permit you to conduct your own investments into your own Personal Pension account. If you want more control over your pension (and future annuity), then you should consider taking out a SIPP. This makes you responsible for both the risks and rewards involved in your Personal Pension’s investments. Here are some tips to help guide you when selecting a UK SIPP:
1. Learn the ins and outs of SIPPs
SIPPs have been available to Britons since 1989. Since then, the rules about what one may invest into them changed. At first, it seemed as though the UK would allow one to invest a wide variety of objects into a sipp, including artwork, antiques, and residential properties even yachts! Ultimately, the government only permitted one to invest residential properties into SIPPs, but attached huge tax breaks to them.
2. Consider SIPPs as a way to supplement your State Pension
Quite frankly, the UK Basic State Pension does not provide enough funds for the majority of Britons. The Baby Boomers are retiring in huge numbers and are living longer than past generations. Coupled with the slowing birth rate of the latest generation, the funds available for the State Pension are quickly dwindling. Thus, the UK government has strived to make Personal Pensions, such as SIPPs, as viable alternatives to the State Pension. The goal is that fewer Britons will live their retirements in poverty.
3. Know how the SIPPs tax benefits operate
It is important for your financial adviser to explain the tax issues related to SIPPs. If you were to use your Sipp fund to purchase an item such as a property, you will receive a tax credit that is equal to the basic tax rate. The rate is currently 22%. As a matter of sipp advice, at the conclusion of the year, you can claim a rebate in cash (due to your tax rate), which you can calculate by using a certain formula. Take the top tax rate (i.e. 40%), and subtract the current basic tax rate. Thus, your total tax benefit includes the rebate that you receive for the original investment, and your credit that is equal to the basic tax rate.
4. Learn how SIPPs relate to the inheritance tax
Your family could certainly inherit the assets of your SIPP fund, upon your death. However, the amount that they could inherit is somewhat of a grey area that the Inland Revenue would calculate. For instance, the UK’s Inland Revenue could determine that you invested in a SIPP in order to avoid paying an inheritance tax. In that case it would charge you for the violation. The best way to avoid such a situation is by seeking the advice of an Independent Financial Adviser, who can take an unbiased look at your particular financial situation.
5. Learn the SIPP rules
Make sure to be aware of the SIPP rules, before investing into a SIPP account:
• Only those UK residents can invest in a SIPP.
• Only those under 75-years-old may secure a SIPP.
• Besides conducing a sipp transfer, one can transfer other pensions’ funds into SIPPs tax-free (though perhaps not fee-free)
• Britons can pay annually a maximum of £215,000 into a SIPP
• Most Britons’ gross pensionable income determines their maximum contribution
• One can only borrow 50% of their SIPP account’s value
When one invests residential properties into SIPPs, the properties must meet certain criteria. A syndicate comprised of a minimum size of 10 people must purchase the property. The members of this syndicate cannot be relatives. Furthermore, the members of the syndicate cannot use the property for private use. In a nutshell, one cannot use SIPP properties as a buy-to-let property or as a personal holiday home.
6. Learn what you can invest into a SIPP
It is important to learn exactly what you can invest into SIPP accounts. You may invest the following items into SIPPs:
• Deposit Accounts (banks/building societies)
• Direct Property Investment
• Gilts
• Insurance Company Funds
• Investment Trusts
• National Savings products
• Residential Properties
• Shares (limited)
• Stocks (limited)
• Traded Endowment Policies
• Unit Trusts
Before you compare sipp and invest any of these items into your SIPP, it is important to know exactly what they are, how they function, and whether they would benefit your retirement plans.
7. Learn the drawbacks of SIPPs
As with any other type of UK Pension, SIPPs have some drawbacks:
• You will not own any property that you invest into your SIPP. Rather, the pension fund will own the property. Thus, you must receive the trustees’ permission prior to making any improvements to the property.
• Properties that are difficult to sell could require you to delay your retirement
• While having a larger SIPP fund would probably make a property investment wise, having a smaller SIPP fund could have the opposite effect.
• The pension fund covers the costs of purchasing a property
• You must pay a market-rate rent if you live in the house
• Selling your property to a SIPP fund involves legal fees and stamp duty
If you want to have more control of your pension fund, then you should certainly consider a SIPP. In addition to seeking the advice of the pensions advisory service, you could also heed the aforementioned tips. You can then take control of your SIPP and your life!
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