The two types of pension currently available to UK residents are private and employer pensions. A SIPP is a private pension which allows you to add funds before income tax is taken off. There is no limit on the number of different pension schemes that you can use, and a combination of schemes may give the best results.
A SIPP is both flexible and portable; you can continue contributing to the scheme even if you experience a change of circumstances, such as the sudden loss of a job.
The amount you can contribute stands at £40,000 if you are in employment and earning up to £150,000. For those earning more than this, you can contribute £1 for every £2 over the £150,000 threshold until you reach the tax-free limit of £10,000.
If you have a pre-existing pension, it is possible to transfer it to a SIPP, but you should consider whether this is the right approach. If you own a workplace pension, you’ll receive financial contributions from your employer. These contributions can present a considerable bonus, and there is no legal requirement for your employer to contribute to a personal pension if you switch over. If you leave an existing pension, you may also be subject to charges which will have a negative effect on your pension balance.
Who can have a SIPP?
Many expats may not be aware that living in the UK is not a requirement in order to benefit from a SIPP. Many expatriates are enjoying the benefits of International SIPPS, which were developed to cater for those living overseas, where other pension schemes are deemed unsuitable. When the time comes to claim your funds, you can have them sent to a foreign savings account in whatever currency you require.
While anyone can hold a SIPP, it’s worth considering whether this is the right choice for you. By their very nature, SIPPs are execution-only; this means that they are managed solely by their owner, not by a scheme administrator. As such, they’re only suitable for people who not only understand investing but also have the time available to research and manage their financial future.
Most SIPPs are managed online only, although some offer postal and phone services for an additional fee. Other SIPP charges may also be added on by SIPP providers, depending on the types of investment you wish to make.
You can invest in various products as you build your portfolio, including commercial property. While this is an exciting prospect for many, it is not for the faint-hearted, as strict SIPP rules apply to the way in which it is managed. You can also add the following to your SIPP:
– Exchange-traded funds (London and European markets)
– Gifts and corporate bonds
– Investment trusts and shares
– Unit trusts
– Open-ended investment companies (OIECs)
Of these, the most common are unit trusts and OEICs. These allow you to join a money pool with other people to invest in international stock markets. OEICs are newer than unit trusts and pose a more attractive proposition to new investors as they spread the level of risk across a wide range of investments. They’re also regulated by the FSCS, much like SIPPs, adding security to your investment.
Which types of investments you choose for your SIPP will depend on your own individual circumstances and your understanding of these products. Currently, you can invest a total of £1 million tax-free in your pension.
SIPPs are subject to annual and transactional charges which may eat into your investment. A tiered annual admin charge, or ‘platform fee’, is added for holding your investment. You may also find yourself being charged dealing fees of up to £12.50 every time you trade or invest in funds or shares.
Income drawdown also comes with its own charges, which can be as much as £300 for the initial set-up and then £150 per year in ongoing charges. While the cost may be small when compared to the potential annual income received, it is worth thinking about the number of years over which you plan to draw an income. As with all personal pensions, you can choose to take your money any time from the age of 55, with 25% completely tax-free and the rest considered income for tax purposes.
Much like other pension schemes, a SIPP also protects your loved ones should you die before the age of 75. Beneficiaries are able to take the entire pension as a tax-free lump sum, choose drawdown or buy an annuity for tax-free income. Should you die after the age of 75, income tax rates will apply.
When it comes to investing in your future, we recommend you review SIPP as a component of your pension planning strategy. While the benefits of SIPPs are clear for both UK and international residents, they are not without risk. With any financial investment product, we recommend that you seek advice from a reputable, regulated source like a Forth Capital adviser before embarking on any investment.