Guide to SIPPs

7/31/2019 Guide to SIPPs

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One College Square SouthAnchor Road, Bristol, BS1 5HLwww.H-L.co.uk

Self Invested Personal PensionsThe commonsense way to build a pensionSIPPs


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4 SIPPs: Whats all the fuss about?

5 More about the investments

7 Is a SIPP for you?

8 What are the tax advantages?

9 What are the eligibility and investment limits?

10 How much should you be saving?

11 How might you invest your pension?

12 What are the options at retirement?

14 Conclusion

15 Important investment notes

CONTENTS

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INTRODUCTION

GuIdE TO SIPPS

A pension made for the 21 st century

S rprisingly SIPPs - or Self Investe PersonalPensions to give them their f ll name - recentlycelebrate their 21st birth ay. Yet it is only inthe last five years or so that they have risen toprominence an become the preferre way forast te investors to manage their pensionarrangements.

In this time, it has become progressivelysimpler to make pension contrib tions answitch between provi ers.

Now another raft of changes simplifies thingsf rther. They make contrib tion allowanceseasier to n erstan , make it more attractiveto pass yo r pension to yo r heirs, removethe req irement to b y an ann ity anmake retirement options consi erably moreflexible.

It is fair to say that a great way to save for yo rf t re has become even better.

The key attrib tes that make SIPPs stan o tfrom tra itional pensions are the free om ancontrol they offer. Instea of being restricte toa han f l of, often me iocre, ins rancecompany f n s; SIPP investors can take theirpick from almost the f ll spectr m of

investments from nit tr sts an shares, rightp to whole commercial properties.

With many SIPPs evelope in the internetage, they often have a s ite of online optionsthat far s rpass most ol er style pensions. Thisgives investors the free om to see a val ation,switch f n s an tra e shares at the click of amo se.

There are two ways you can start a SIPP:

1. New contributions (s ch as monthlypayments an one off l mp s ms) whichattract tax relief at p to 50% epen ing on yo r circ mstances.

2. Transfers from other pensions allowinvestors to move away from o t atearrangements or consoli ate n mero s

plans n er one roof.

With an age of a sterity in p blic spen ingpon s an private companies provi ing less

genero s pensions, in ivi als willincreasingly be req ire to make their ownretirement provision. SIPPs look set to servetheir investors well an have a bright f t re asthe r les have become simpler still.

This g i e explains the pros an cons of SIPPsin plain English; in icates who can prosperan who may be more s ite to a stakehol erpension. Yo sho l fin it sef l an if itraises any q estions for yo please o nothesitate to contact o r pensions help esk on0117 980 9926 . One of o r specialists will be

elighte to assist yo . Please note tax r lescan change.

Alex Davies

Director of Pensions


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WHAT IS A SIPP?

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SIPPs: Whats all the fuss about?

A SIPP works in the same way as any otherpersonal or stakehol er pension, in terms of tax benefits, contrib tion limits an retirementoptions. Yo make contrib tions, have thembooste by basic rate tax relief an claim anyhigher rate relief via yo r tax ret rn. Yo leavethe contrib tions to grow, an then, at somepoint from age 55 yo can convert part of theacc m late f n into a tax-free l mp s man take a taxable income from the remain er.

The main way in which SIPPs are s perior topersonal an stakehol er plans is in theirinvestment choice.

Stakehol er pensions have low charges, b tten to offer a limite choice of f n s.

Tra itional personal pensions, meanwhile,ten to offer a wi er choice of f n s thanstakehol er schemes - between a ozen an

several h n re - b t can carry hefty charges,partic larly on ol er plans. Both types ares ally r n by ins rance companies, which

generally only offer their own f n s or alimite selection from other f n managers.The rawback is while a single company mayhave expertise in one area, it is nlikely to havethe best recor across all f n sectors. Onemight offer a goo Far East f n , while anothermay be renowne for its expertise in pickingE ropean shares.

SIPPs offer the wi est possible choice of investments, allowing hol ers to pick f n sfrom across the market. Yo co l choose a topuK smaller companies f n r n by investmentho se A, a lea ing uS manager at investment

ho se B an a top fixe income manager atinvestment ho se C. With a personal pension, yo m st choose from the investments offereby that partic lar pension provi er. Some of the f n s offere may be goo , b t it is

nlikely that all of them will be.

A goo way to think of a SIPP is as a shoppingtrolley into which yo can place many ifferenttypes of investment, incl ing f n s, shares,bon s, gilts, f t res an options, commercialproperty an more. The SIPP itself is merely atax-efficient wrapper aro n thoseinvestments.


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What investments can I choose? PersonalPension

SIPP

Collective Investment FundsUnit TrustsInvestment Trusts

OEICs (Open Ended Investment Companies)Exchange Traded Funds (ETFs)Insurance company managed funds andtheir range of funds run by other managers

Stocks and SharesIndividual UK equitiesOverseas Equities, eg US or European sharesUK GiltsBonds and other fixed interest securitiesFutures and optionsPIBS - Permanent interest bearing shares

Some of the other investments include:Cash and DepositTraded Endowment PlansCommercial property and land

Loans

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More about the investments

WHERE YOU CAN INVEST

GuIdE TO SIPPS

P e r s ona l/ St a k eh olde r P e ns ion

SIP P

With a personal pension you can choose from a limited selection of investment funds offered by your pension provider.

With a SIPP you can choose a widevariety of different investments, froma wide range of providers.


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More about the investments

WHERE YOU CAN INVEST

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Collective investments are extremely pop laran incl e nit tr sts, investment tr sts,OEICs an ins rance company f n s. Togetherthey make p a range of tho san s of ifferentinvestment f n s, offere by h n re s of

ifferent f n managers an ins rers. Someinvest wi ely aro n the worl an across

ifferent types of asset, while others are morespecialise , foc sing on a partic lar region ortype of share.

Investors can also hol in ivi al uK an over-seas stocks an shares, as well as uK gilts, cor-porate bon s an other fixe interest sec rities.Even f t res an options can be incl e .

Whilst waiting to make an investment ecision yo may keep yo r SIPP in cash. In ee some

SIPP hol ers are happy with cash in theknowle ge they have obtaine tax relief.

In s mmary, yo may invest across a wholespectr m. Some provi ers offer a morerestricte choice.

Some SIPPs offer the choice of commercialproperty. They ten to be expensive. Low costSIPPs ten to excl e commercial property.

Remember that investments sho l be hel forthe long term as they o fall as well as rise in val e. This means yo co l get back less than yo investe . As yo approach retirement yo

sho l normally re ce expos re to volatilean riskier investments in preparation forsec ring yo r retirement income.


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GuIdE TO SIPPS

SIPP QUESTIONS AND ANSWERS

Is a SIPP for you?

SIPPs arent for everyone. Some investors onot req ire the h ge investment choice, othersmay have a eq ate pension provision thro ghtheir employer. Flexibility an broainvestment choice are partic lar attractions forthose taking responsibility an control of theirpension.

If starting a personal pension look at all theoptions.

If investment choice an flexibility are notimportant to yo , an yo r contrib tions aregoing to be low, then a stakehol er pensionco l be a cheaper an better option than aSIPP. If yo want access to the best f nmanagers in the market a low-cost SIPP may

be a better choice. If yo want to investirectly in commercial property or more exotic

investments these are normally offere by themore expensive SIPPs. With a SIPP yo sho lhave the esire an confi ence to take controlan make investment ecisions.

If yo alrea y have a personal or stakehol erpension yo sho l in any case reg larlyreview yo r arrangements, altho gh fewpeople o.

Transferring to a SIPP is not iffic lt. Peoplereg larly change their car ins rer or mortgageprovi er, few however take the tro ble to re-examine their pension. Many ol personalpension arrangements have cripplingly high

fees. They often s ffer poor f n performance.However before transferring, yo sho lens re that yo will benefit from oing so, an

check that yo will not inc r any excessivepenalties or lose any g arantees or otherbenefits.

Most pension plans are provi e by ins rancecompanies, which generally o not have thebest recor for investment performance. Thereare exceptions. Investment f n s r n byspecialist companies have historicallyperforme better, altho gh past performanceis not a g i e to the f t re.

If yo wish to escape from me iocre f nperformance, an take control of yo r pensionarrangements, SIPPs offer access to the f n sof specialist investment companies. An if charges are blighting yo r pension f n yo

co l try a low cost SIPP.

Certain SIPPs, s ch as those offeringinvestment in commercial property, areexpensive b t low-cost SIPPs can representexcellent val e epen ing on the size of thef n an the investments chosen. Low costSIPPs may not incl e investments s ch ascommercial property.

If yo have any o bts abo t the s itability of a SIPP for yo r circ mstances yo sho l seeka vice.


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8

What are the tax advantages?

SIPPs have the same tax benefits as otherpersonal pensions, incl ing basic-rate taxrelief a e by the government for personalcontrib tions. This boosts yo r initialcontrib tions. It works like this:

For every 80p yo pay into yo r personalpension, the government a s 20p, boosting itto a gross contrib tion of 1. This basic-ratetax relief is claime by yo r SIPP provi er, anwill be a e to yo r pension a tomatically.Almost every uK resi ent n er 75 q alifies forthis tax relief, even chil ren an other non-taxpayers. Higher-rate taxpayers enjoy evengreater tax relief, as they can claim back p toa f rther 20p of every 1 gross contrib tion

thro gh their tax ret rn or local tax office.

This means, for example, that a 10,000contrib tion wo l ltimately cost yo 8,000if yo are a basic rate taxpayer, an from aslittle as 6,000 if yo are a higher-rate taxpayer. Those paying tax at the top rate of 50%can claim p to an extra 30p back per po nre cing the cost of a 10,000 contrib tion toas little as 5,000.

In a ition to the p-front tax relief, theinvestments within yo r SIPP grow free of uKcapital gains an income taxes, altho gh taxesalrea y e cte from ivi en s cannot bereclaime .

Employer contrib tions are pai gross, how-ever if an employer pension contrib tion ranksas a vali b siness expense, it can be offset

against the taxable profits of the b siness. Anycontrib tion an employer pays on yo r behalf sho l not co nt as a taxable benefit so sho l

not be liable to tax or National Ins rance.

Yo can normally take p to 25% of yo r f nas a tax-free l mp s m when yo retire. Therest m st be ma e available to provi e a tax-able income. If yo ie before taking retire-ment benefits, the f n can be ma e availableto provi e a taxable income for yo r epen-

ants or can normally be pai as a l mp s m,free of tax, to yo r nominate beneficiary.

Information in this g i e is base on o rn erstan ing of c rrent pensions an tax

r les an reg lations an these are s bject tochange. The exact relief yo are entitle to will

epen on yo r circ mstances.



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What are the eligibility &investment limits?

Nearly everyone n er 75 in the uK is eligibleto start a SIPP or transfer in another pension,even chil ren.

To benefit from tax relief on contrib tions pto age 75, yo nee to be resi ent in the uK, orbe a Crown Servant serving overseas, or theirh sban , wife or civil partner. Yo can alsobenefit, even if yo have been non-uK resi entfor p to 5 years, if yo were resi ent when yostarte the SIPP. If yo meet these basicreq irements yo can s ally pay in at least2,880 per tax year, which with basic-rate tax-relief is booste to 3,600, whether yo are ataxpayer or not. This means that chil ren,retire people, an non-working carers or

parents can b il p a pension pot.

Many people will be able to pay in more.

unlimite contrib tions are allowe , b t taxrelief will only be given on the higher of 3,600or an amo nt p to 100% of relevant uKearnings where this is a personalcontrib tion. Generally this is earnings fromemployment or self employment.

Each year there is an ann al allowance oncontrib tions; this tax year it is 50,000.Where the total contrib tions (personal,employer an the val e of benefits being b ilt

p in final salary schemes) excee the ann alallowance yo will normally be taxe on theexcess. It is also possible that yo co l beaffecte by this if combine contrib tions overtwo consec tive tax years excee one yearsann al allowance.

There is a new facility to potentially carryforwar any n se ann al allowance fromthe three previo s years. We have a factsheeton carry forwar that can be req este on 0117980 9926.

There is also a lifetime allowance. It isc rrently 1.8 million b t it is set to rop to1.5 million from 6th April 2012, altho gh itmay be possible to protect yo rself from thisre ction. This applies to all yo r pensionsavings. If yo r total pension benefits takenexcee the lifetime allowance the excess co lbe hit with a lifetime allowance charge of p to55%.

If yo registere with HM Reven e & C stomsbefore 6 April 2009 to protect yo r pensionagainst the lifetime allowance then making

GuIdE TO SIPPS



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any f rther pension contrib tions willnormally lose any Enhance Protection yohol .

What happens to my SIPP if I diebefore taking retirement benefits?

If yo ie before yo have taken retirementbenefits an before age 75, yo r SIPP willnormally be passe to yo r nominatebeneficiaries free of inheritance tax. If yo aremarrie /in a civil partnership any protecterights m st be ma e available to provi e yo rspo se or civil partner with a taxable income.If yo have not taken retirement benefits byage 75 an yo r SIPP is pai as a l mp s m a55% tax charge is payable on yo r eath.

How much should you be saving?

This will epen on yo r personalcirc mstances. We are nable to offer a viceon these pages, b t as a general r le of th mb,if yo want to retire at 65, yo sho lcontrib te an ann al percentage of yo rearnings eq ivalent to half yo r age when yostart saving. If yo start saving when yo are20, for example, consi er p tting asi e at least10% of yo r salary ntil retirement, while if yo start at 40, consi er at least 20%; either asann al l mp s ms or reg lar monthly savings.Yo sho l also make s re that this percentageis maintaine as yo r earnings increase. Yo

may fin o r interactive pension calc lator ono r website www.H-L.co.uk helpf l.

Not everyone will retire at 65, so yo sho lalso consi er how long yo might be retire . A40-year-ol planning to retire at 65 wo l havethe same time to retirement as a 30-year-olwanting to retire at 55. B t the 30 year olwo l nee to save m ch more each month, orhope that their investments grow m ch faster,as their retirement sho l be m ch longer.Beca se of this they wo l receive lowerann ity rates. They wo l also not get any state

pension for at least the first eleven years of theirretirement.

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How might you invest yourpension?

Many people with pension plans think the jobis one once they have ma e theircontrib tions. They are oblivio s to where theywill be investe . They are s ally g i etowar s what is known as the efa lt f n ; anins rance companys manage f n withmixe , b t generally poor, performance.

It is sensible to ens re a iversifie portfolio,sprea across ifferent assets - eq ities, fixeinterest stocks s ch as corporate bon s angilts, property an cash. Then within the eq ityan bon elements, f rther iversificationacross ifferent geographical areas an sectors.

A manage f n p rports to o this b t it israre that one company is goo in all

investment areas. A SIPP allows yo to pick aportfolio of specialist f n managers, eachwith emonstrable ability in their chosen area.

If yo are ten years or more from retirement,eq ity-base f n s sho l generally form theb lk of yo r portfolio. A uK base investormight have the majority in uK eq ities withsmaller proportions in American, E ropean,Japanese, Asian an Emerging Markets.Expos re to fixe interest an commercialproperty f n s co l also be consi ere . In aSIPP yo can vary these epen ing on the risk yo are prepare to accept an vario s viewson the market.

As yo near retirement volatility becomes a

greater anger. If yo take yo r pension byway of an ann ity yo sho l look to increase yo r expos re to fixe interest an cash

gra ally, aiming to move f lly into cash anfixe interest once yo are close to retirement.This to provi e some protection against

s en market falls an to a lesser egreere ctions in ann ity rates. Yo r perception of market levels will also assist these ecisions.Yo sho l try to time yo r movements o t of eq ities an into fixe interest for whenmarkets peak.

Getting started

There is no better start to a pension f nportfolio than investments that pro ceincome. If yo have more than five years toretirement we believe a goo place to start iswith eq ity income f n s.

These investments can be a goo start b tco l also be retaine if an when yo takebenefits by means of a raw own arrangement(see page 12). Nearer to retirement yo mightwant other types of income generatinginvestments s ch as fixe interest. depen ingon the size of yo r portfolio an yo r timehorizon yo may a higher risk investmentsin the hope of a higher rewar investmentsin emerging markets an specialist sectors.

GuIdE TO SIPPS



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12


Any investor who has taken a vantage of taxrelief an investment growth to acc m late apension f n will want to make the best

ecision on retirement.

The Options:

SIPP investors, like other personal pensionsavers, can take pension benefits after the ageof 55. There is no pper age by which yo haveto take retirement benefits an therefore noreq irement to take retirement benefits at allsho l yo wish to keep yo r pensioninveste .

When yo take benefits from a SIPP, yo cannormally take p to 25% of yo r f n as taxfree cash. The rest m st be ma e available toprovi e a taxable income. Yo can either sethe remaining f n to b y a lifetime ann itywhich pays a sec re income for at least the restof yo r life or it can be ma e available toprovi e a taxable income irectly from yo rSIPP.

Lifetime Annuities

An ann ity is an income for the rest of yo rlife. Ann ities come in two main varieties:conventional , where income is fixe ,inflation-linke , or set to increase by a fixepercentage each year; an investment-linked , where income rises or falls epen ing

on the performance of n erlying f n s.Conventional ann ities are sec re, howeverinvestment linke ann ities are more risky.

Once yo have bo ght an ann ity, the originalpension f n can no longer be inherite by yo r family when yo ie ( nless yo havechosen val e protection - see below). However,it is possible to b y joint ann ities which willcontin e to pay o t to a spo se or partner if yo ie before them, or to b y an ann itywhich is g arantee to pay o t for p to ten years, even if yo ie within that time.

Value Protected Annuities

These pay o t a l mp s m if yo ie before aspecifie age. The amo nt pai will representthe ifference between the f n se to b ythe ann ity an the payments ma e so far, anwill be taxe at 55%. They are more expensivethan a simple lifetime ann ity beca se of the

cost of the protection. It is possible to protecta portion of yo r f n , for instance 50% val eprotection.

Income Drawdown

This allows yo take yo r tax free cash ankeep the f n investe , while rawing anincome irectly from yo r f n .

With a raw own plan yo r f n is stillinveste , an therefore will s ffer the volatilityof markets. As any income with rawals ancharges will be a rain on the f n s, soincome raw own is s ally s ggeste onlyfor those with large f n s (over 100,000) orother so rces of income. It is certainly a riskieroption than an ann ity. Poor investment

performance or large income with rawals canq ickly ero e yo r f n s val e. In a worstcase scenario this co l completely eplete

What are the options at retirement?


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GuIdE TO SIPPS


yo r f n leaving yo reliant on other so rcesof income. Remember, once in retirement yoare nlikely to have the ability to earn moneyto make p for losses. One way to se income

raw own is to j st take the nat ral yiel of the n erlying investment.

If yo ie while in raw own the remainingmoney can be se to provi e an income for yo r epen ants or pai as a l mp s m to yo rnominate beneficiary less a 55% tax charge.

unless yo are in flexible raw own thegovernment restricts the amo nt of income tobroa ly the same as the income from anann ity. There is no minim m income thatm st be taken. If yo wish to contin e

contrib tions once yo are in raw own thenthere may be f rther restrictions. This is acomplex s bject on which we s ggest yo takea vice.

Flexible DrawdownThis gives yo control over the amo nt of taxable income that yo take, nrestricte bythe government efine limits. To q alify forthis option yo nee to meet certain criteriaincl ing being in receipt of g aranteepension income of at least 20,000. This co lbe state pension, pension ann ities or finalsalary pension income, b t cannot incl e anynon-pension income. Once in flexible

raw own yo are effectively prevente frommaking any f rther pension contrib tions or

b il ing p any f rther pension benefits infinal salary pension schemes.

Phased Retirement

Yo ont have to convert all yo r pensionf n into an ann ity or income raw own inone go. Instea yo can split it into segmentsan convert the segments gra ally, receivinga series of tax-free cash payments an anincreasing income, ntil the f n is f llyconverte . This also enables yo to split yo rf n between an ann ity to f n yo revery ay basic expenses an raw own forthe l x ries.


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CONCLUSION

No-one sho l care more abo t yo r retire-ment planning than yo .

A SIPP is a genuine enabler: it asks yo tomake choices b t this nee not be a nting. Ittakes a little work an some monitoring - b tthis is yo r money.

A SIPP gives yo access to the top f nmanagers, an the power to change yo rinvestments when yo want. Best of all, SIPPs

nee not be expensive. Low-cost SIPPs herala new chapter in pension investing. With aSIPP, yo have access to the best f nmanagers in all sectors.

Yo r pension is likely to be the most val ableasset after yo r ho se in some cases the most val able. Give it the attention it eserves. To

fin o t more, call o r pensions help esk on0117 980 9926 .

Give your pension the attention it deserves


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GuIdE TO SIPPS

This g i e is p blishe to help clients maketheir own investment ecisions. It oes notconstit te a personal recommen ation in anyway whatsoever. All investments sho l behel for the long term as their val e oes fallas well as rise, therefore yo co l get backless than yo investe . Neither capital val es,nor income, are g arantee . Past performanceis not a g i e to the f t re.

If yo r employer offers a pension yo sho lconsi er joining or making a itionalcontrib tions to this first. Sho l yo have any

o bt as to the s itability of an investment for yo r circ mstances yo sho l contact o rFinancial Practitioners for in ivi al a vice.

Any tax reliefs referre to are those c rrentlyapplying, b t levels an the basis of, as well asreliefs from, taxation are s bject to change.Their val e epen s on yo r in ivi alcirc mstances.

The information in this g i e is base on o rc rrent n erstan ing of existing anpropose legislation as at April 2011 whichmay be s bject to change. The r les of apension scheme may sometimes be morerestrictive than the legislation.

Hargreaves Lans own is a thorise anreg late by the Financial Services A thority(FSA).

Important investment notes

FURTHER INFORMATION

Contact us

Our specialist helpdesk can answer your queries.

0117 980 9926

[email protected]

www.H-L.co.uk

Hargreaves Lansdown, One College Square South, Anchor Road, Bristol, BS1 5HL


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Hargreaves Lansdown Asset Management Ltd, One College Square South, Anchor Road, Bristol, BS1 5HL.Authorised and regulated by the Financial Services Authority

Enquiries:

SG

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Guide to SIPPs

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