SIPP Pension Advice

SIPP Tax and Eligibility - Who Can Make a SIPP Contribution?

The question of who can make a contribution into a SIPP Pension come up frequently.  The answer is, in fact, fairly straightforward. Anyone can contribute to a SIPP pension, but you can claim tax relief on the contributions only if you are not older than 75, and in addition can satisfy at least one of the following stipulations:

* You have taxable income in the UK, ie you have earned income from within the UK which derives from your employment or from a self employed business.
* You are UK resident during the tax year when you make the contribution.

Is my employer allowed to make a contribution to my SIPP Pension?

Of course, your employer is permitted to contribute, and this is one of the key benefits of a SIPP pension. Contributions are allowable for corporation tax relief if the contributions are ‘wholly and exclusively’ for business purposes.

How much is the Annual Allowance for a SIPP Pension?

The Annual Allowance restricts the quantum of tax benefits you can obtain by contributing through your SIPP Pension. This applies to all pension contributions through all of your schemes that you have in place - so if you are contributing through your company scheme, or any other traditional pension plans, then you need to take these into account when calculating your allowance.  If you exceed this allowance, then you will be liable to pay an annual allowance charge, which is currently set at 40%.

The Annual Allowance for tax years for 2009 is GBP245,000, and for 2010/2011, is GBP255,000.  After the 2010/11 tax year, future increases in the Annual Allowance will be determined on an annual basis, and will be notified in due course by the tax authorities in the UK.

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Self Invested Pensions are becoming increasingly popular. To start up a SIPP an individual or their employer needs to approach an approved provider. These are normally insurance companies or fund managers but a comprehensive list is publicly available. You must use one of these providers to take full advantage of the tax benefits. Once a provider has been chosen, the plan holder can then manage the portfolio themselves, or they can appoint a manager to act on their behalf.

One of the key benefits of a Self-Invested Personal Pension is the tax advantages. Like all other personal pension plans, contributions to SIPPs are automatically exempt from basic rate tax. If you are a higher rate payer, you can claim additional relief in your tax returns. Similarly, if you have used your SIPP to invest in assets such as property, the income you receive is tax-free and is not subject to capital gains tax.

As with all pension plans, after retirement, the income that you draw-down will be subject to the usual income tax rates. The money you earn from your investments is also allowed to be reinvested tax-free, up to a threshold £235,000. Reinvesting your income is a great way of growing your pension pot without any upfront costs.

Another key advantage of a SIPP is its flexibility. Unlike other tax-efficient saving schemes, a SIPP gives you the ability to invest in a wide variety of stock market properties so you can potentially access higher rates of return even if rates are low. This will not be perfect for everyone, as SIPPs can be exposed to more risk, but for those who are not attracted to the rates offered by savings accounts and ISAs, SIPPs are a great alternative.

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Saving in a pension such as a SIPP has significant tax benefits. The government will contribute 20% of every gross contribution you pay - meaning a £1,000 investment in your SIPP costs you just £800. If you’re a higher rate tax payer, the tax benefits could be even greater. In the above example you could claim back as much as a further £200 via your tax return if you have sufficient income or gains in the higher rate tax bracket.

Restrictions introduced in the Budget on 22 April 2009 limit the contributions of anyone whose total annual income has reached £150,000 from 07/08 onwards. Download our Budget fact sheet for more details.

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 tax free lump sum. The remainder is then used to provide you with a taxable income.

Newer styles of pension plans run by insurance companies now tend to offer a limited selection of funds from other fund managers, plus their own in-house funds.

SIPPs offer the widest possible choice of investments for individual pension plans, allowing holders to pick funds from across the market.

A SIPP can hold all the asset classes required to give you the chance to build a diverse investment portfolio that has just the right level of risk you are happy being exposed to. SIPPs are now a real option to cost effective pension planning.

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