NEWSLETTER: SIPP Basic Rules 2011

Contributed by MW Pensions. [www.mwpensions.co.uk]

We thought that this month it might be useful to revisit the basic principles of SIPPs, explaining also the new changes.

What is a Self-Invested Personal Pension (SIPP)?
It is a Registered Personal Pension Scheme, where the member decides where the assets are to be invested. In other words, it does what it says on the tin – it is a personal pension and the member directs where the monies are to be invested.

Who are the trustees?
• In some SIPPs the member and the SIPP provider's trustee company are joint trustees
• In other SIPPs, the SIPP provider's trustee company is the sole trustee.
• For the MW SIPP 2 it is the latter – MW SIPP Trustees Limited is the sole trustee.
• But they have an overriding duty of care to protect the investments for the member

Who can have a SIPP?
• Basically anyone in the UK up to age 75
• There is no lower age limit – they can be set up at birth.

Investments (other than property)
• Can invest in anything, but some (most) investments are wholly tax free on both income and capital gains (other than ACT payable on UK dividends) whilst other investments can attract penal tax
• Penal tax of 40%, 55% or even 70% applies on such investments as art, antiques, personal chattels such as yachts, racehorses etc

Property investment
• UK commercial property fully tax free
• Overseas commercial property may be subject to local taxes
• UK residential property allowed as a wholly tax free investment provided it is via a "suitably diverse commercial vehicle". This means either via a unit or investment trust, or REIT or OEIC or directly - but if direct, it must be a portfolio of at least 3 properties (or £1M), with no one property being more than 40% of portfolio, and the SIPP member (together with any connected party) cannot own more than 10% of the portfolio
• Overseas residential is same as for UK residential, but there may be local taxes and local legal issues re ownership etc. Note that we do not allow direct investment in non-UK property.

Borrowings
• A SIPP can borrow up to 50% of the net assets of the SIPP for any purpose
• Must be on commercial terms
November 2011 2

Loan Backs
• No limit but must be prudent, secure and commercial.
• Cannot loan to member or a connected party.
Note that we do not allow loans form MW SIPPs

Unquoted Shares
• No limits imposed by HMRC though we limit it to 30% of a member's total pension assets
• But HMRC might impose penal taxes on shares in connected companies that have "taxable property" – we advise caution
Note we do not normally allow investment in shares in a connected company.

Investment transactions with Connected Parties
• Permitted by HMRC
• Must be on commercial basis
• Must be independently valued
• Can be both ways i.e. SIPP can buy from or sell to the member.
Note that we do not normally permit investment in a connected company

Contributions
• Up to a total of £50,000 in tax year 2011/12 by company and/or member, with full personal or corporation tax relief on such contributions, provided: a) member's contributions do not exceed 100% of salary. b) company contributions can be justified to Inspector of Taxes as being relevant to member's involvement with the business
• The limit of £50,000 covers all pensions for a member – so if the member has an insurance pension policy with an annual premium of £15,000, a maximum of £35,000 can be paid for him into the SIPP.
• Carry forward available for unused annual allowance up to £50,000 per year for previous 3 years

Maximum benefits
• Lifetime allowance up to £1.8M fund but reducing to £1.5M on 6.4.2012

Benefits payable
• Can be taken any time after age 55.
• 25% of fund can be taken as tax free cash sum
• Can take tax free cash sum and defer taking annual income
Annual pension depends on fund size but is between zero and 100% of basic drawdown pension: this is roughly equivalent to what member would get if an annuity were bought (but no need to buy an annuity). Different maximum for those who reached age 75 prior to 22.6.10.
• Reviewed every 3 years up to age 75 and annually thereafter
• For those currently in receipt of Drawdown Pension the new 100% limit does not apply until their next review.
November 2011 3
• Higher drawdown is possible provided the member can demonstrate at least £20,000 per year guaranteed pension income
• No need ever to buy an annuity

Death
• On death before drawing benefits, whole of member's fund can be paid out as lump sum free of IHT
• On death after starting to draw benefits (includes just taking the tax free cash sum) if no annuity has been bought fund is used to provide income each year to spouse/dependants. Alternatively, can pay out whole of fund but tax of 55% is paid. Residual 45% fund exempt from IHT.

Protected Rights
• Allowed
• No investment restrictions
• Must be used on death to provide income at specified minimum level to surviving legal spouse or civil partner
• Abolished from April 2012

New GAD rates
2011 GAD rate tables and guidance on their use are available at

http://www.hmrc.gov.uk/pensionschemes/gad-tables.htm

The reduced Annual Allowance
HMRC have also issued guidance on the reduced Annual Allowance It can be found at:

http://www.hmrc.gov.uk/pensionschemes/annual-allowance/index.htm

We do not give financial advice and no comments here are intended as such. The above information is based on our understanding of the legislation governing pensions at the time of writing. Before taking any action you should consult a qualified financial and/or tax adviser. Levels, bases of and reliefs from taxation may be subject to change.

This Newsletter is intended for professional advisors only, not members of the general public

Read More Contributed Articles