IN these troubled economic times, when we are worried about the credit crunch and the recession, it is difficult to think about anything other than today.
However, the right decisions now can have a huge bearing on our standard of living in retirement and the worst thing we can do is “do nothing” because of the current situation.
A Self Invested Personal Pension (SIPP) is a personal pension that allows you to select, manage and keep control of your own investments, offering a great, taxefficient way to save for your retirement.
Unlike a traditional personal pension, a SIPP usually offers far greater flexibility in terms of the assets that can be held within its tax-efficient wrapper. A SIPP enables investors to spread investment risk across various asset options, including commercial property, but also to select investments that aim to meet any specific requirements and financial objectives set. Please note that any assets held within a SIPP will be owned by the pension fund rather than by you.
SIPPs fall under the same basic rules for contributions and tax relief as personal pension plans. You may invest up to £245,000 in 2009-10 to receive tax relief up to 100% of your earnings. There is a lifetime allowance for the maximum amount payable that is treated as tax-privileged, which is currently set at £1.75 million for 2009- 10.
Withdrawal
When you wish to withdraw the funds from your SIPP, between the ages of 55 and 75 (50 and 75 before April 2010), you can normally take up to 25% of your fund as a cash lump sum, free from tax. The remainder is then used to provide you with a taxable income.
A SIPP offers all the valuable tax benefits you expect from a pension:
■ Tax relief at your highest rate on payments paid into your plan by you or any third parties (excluding your employer). If you’re a higher rate tax payer, you could boost your savings by up to 40%. This means that £12,000 can in effect be turned into a £20,000 contribution!
■ Tax relief is even available to non-taxpayers. They can contribute up to £3,600 a year, including basic-rate tax relief.
■ Investments in your pension will grow free of UK capital gains tax and income tax from the age of 50 (55 from 2010) you can take a 25% tax-free lump sum from your pension fund, which you are free to invest or spend as you wish.
You also need to balance the advantages of investing in a SIPP with the fact that the set-up costs and charges are likely to be more expensive than for a stakeholder or personal pension. In addition, SIPPs are unlikely to be suitable for smaller pension funds and can be complicated, making them more suitable for sophisticated investors. A vast array of investments can be held in a SIPP to meet the objectives of your investment strategy.
The Government has recently lifted restrictions on where protected rights contributions can be invested. This means you can now make your money work harder by transferring your protected rights funds from your current pension plan into a SIPP.
What are protected rights?
If you have contracted out of the State Second Pension (S2P) or the State Earnings Related Pension Scheme (SERPS) at any time since 1988, your pension scheme will have received annual National Insurance rebates. These rebates are known as “protected rights” which can now be invested in a SIPP.
Transferring funds from a personal pension into a SIPP gives you access to some of the most popular funds, from the most well-known fund providers, as well as meaning that you could invest into other assets such as stocks and shares should you wish.
Moving your protected rights money to a SIPP also allows you to:
■ benefit from greater flexibility and control when taking an income for retirement;
■ manage all of your pensions within a single portfolio;
■ make the most of new investment opportunities as they arise without paying switching charges.
Transferring a pension plan
Moving money from another pension plan can give you greater freedom about how your savings are invested. It can also make it easier for you to manage your pension plan alongside your other investments.
Things to consider before transferring:
■ Compare the charges on your current plan with those of the one you are transferring to.
■ Find out if your current plan will penalise you if you go ahead with the transfer. Some charge an exit fee or a market value adjustment. This should be clear from your most recent statement – look for a difference between the current value of your plan and its transfer value.
■ Check if your current plan offers benefits (such as life assurance) or guarantees not available through the SIPP.
■ Find out whether your employer would be able to make payments into your SIPP instead of any current pension plan.
■ Make sure that you will not be missing out on any investment opportunities.
There have been a number of changes over the years and it is vital that professional advice is taken before considering these retirement planning options. However, as stated at the start of this article, “doing nothing” should never be the option chosen, even in these troubled times.
■ The author can be contacted at AB Wealth Ltd, Almswood House, 93 High Street, Evesham, Worcs. WR11 4DU; telephone 01386 442597, e-mail andrew.neale@abwealth.co.uk.
