Self Invested Personal Pensions (SIPPs)

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1 1 Self Invested Personal Pensions (SIPPs) listening, understanding, advising

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3 Why SIPPs? A Self Invested Personal Pension (SIPP) is a pension scheme that enables you to have a great degree of control over your money. SIPPs offer our clients a wide range of potential investments including commercial property, equities, gilts, bonds and cash deposits, providing greater flexibility. A SIPP will enjoy considerable tax benefits including: n Contributions by members are free from income tax n Company contributions normally qualify for corporation tax relief in the year they are made n Investments (other than dividend income) grow free from income tax and capital gains tax n A pension commencement lump sum can be taken from age 55, free of tax n Lump sum death benefits can be paid free from inheritance tax

4 Funding your SIPP Member and Employer Contributions The members and their employer may contribute to the SIPP and receive tax relief up to a maximum level known as the annual allowance. The annual allowance for the 2011/2012 to 2013/2014 tax years is 50,000 per annum reducing to 40,000 from the 2014/2015 tax year. Tax relief on contributions in excess of the annual allowance can be obtained by using any unused annual allowance from the previous three qualifying tax years, providing the individual was a member of a registered pension scheme. This facility is called carry-forward and further guidance is available. Please ask for a copy of our carry forward guidance notes. Members can contribute to their SIPP up to age 75 and receive tax relief up to 100% of the member s earnings in any tax year. Tax relief is also limited by the annual allowance, which may include the total of the current annual allowance and any unused qualifying annual allowance carried forward from previous tax years. Employer contributions are also allowed and will receive tax relief in the year they are made, provided they are wholly and exclusively for the purposes of the employer s trade. In Specie Contributions In Specie Contributions can also be made to a SIPP. These involve the transfer of the legal ownership of an asset (other than cash) from a company or an individual to a pension scheme without the need for a sale and repurchase. The value of the asset at the point of transfer is treated as the amount of pension contribution on which tax relief is claimed. Transfers Members may also have benefits in other pension arrangements which can be transferred into the SIPP. This includes plans where benefits are being paid (income drawdown) and funds accrued as a result of being contracted out of the State Pension scheme (protected rights). Potential advantages: n Control n Reduce costs n Increase borrowing capacity, property purchase (see Investments) A SIPP can also receive pension transfers by way of an in-specie payment. i.e. in their existing form, without having to surrender the investments before transferring them. In specie transfer of assets can be a complex process involving several different parties and will usually take longer than cash transfers. A SIPP is an ideal vehicle for consolidating existing pension arrangements. Our pension experts can help you to determine the most suitable assets to place into your SIPP.

5 Investments One of the main features of a SIPP is that the member has full control over the investment of their funds and Old Mill aims to give guidance and advice to the member as to the most appropriate options. The main types of investment include: n Bank and Building Society deposits n Quoted equities on the London Stock Exchange n Quoted equities on recognised worldwide stock exchanges n Unit Trusts and Open Ended Investment Companies n Commercial property and land n Gilts, Bonds and Fixed Interest Stocks n Shares in the principal employer n Offshore managed funds n Futures and options n Insurance company managed and unit linked funds n Hedge funds Property Using a SIPP can be an extremely attractive and tax efficient way of purchasing commercial property from either a third party, the member or from their business. Once the property is an asset of the scheme it can be leased back to the business at a commercial rent or to a third party. For further information please ask for a copy of our Self Invested Property Guide. Borrowing The scheme can borrow up to 50% of its net assets. Borrowed funds can be used for investment, or to help finance property purchases or other commitments such as the payment of pension or death benefits. Prohibited Investments The investments that are prohibited include n Residential property that does not meet the residential property exemptions n Loans to member trustees or connected parties n Property investments in Limited Liability Partnerships n Antiques n Fine Wines n Works of Art n Vintage cars n Yachts n Jewellery and gem stones n Rare books and stamps We use our robust investment process to build a sound financial strategy. Crucially, this is based upon a thorough understanding of what members want to retire on. We are in this with you for the long term and understand the importance of guiding you through the different financial stages of your life. An Old Mill Financial Planner will work with members to ensure that you have the right investments to meet your retirement goals.

6 Lifetime allowance The lifetime allowance is the maximum pension fund that an individual can accumulate from all of the pension schemes of which they are a member during their lifetime, without being subject to a tax charge, known as the lifetime allowance charge. A member s fund is tested against the lifetime allowance when they take benefits and at age 75 if benefits have not been taken. The lifetime allowances for the tax years from 2012/2013 until 2013/2014 will be 1,500,000 reducing to 1,250,000 from the 2014/2015 tax year. It is possible to accure pension benefits above the lifetime allowance and not incure a lifetime allowance charge if the member has registered for protection. Benefits on Death If a member dies, the individual s funds can be paid out either as a lump sum and/or a dependant s pension. Up to age 75 if a member is not drawing on their fund, then the lump sum is tax free within the Lifetime Allowance. If the member has started to draw benefits or is over 75 a 55% tax charge applies to lump sum death benefits. A dependant s pension can only be paid to a spouse, civil partner or someone that is financially dependent on the deceased member. In normal circumstances there will be no inheritance tax liability on such payments regardless of when death occurs.

7 Taking the benefits from a SIPP These days no-one has a job for life. People work for longer and often adopt more flexible working practices, maybe working part time or in a consultancy capacity. A SIPP, and the way you derive an income from it, should reflect these changing circumstances. A SIPP gives you this flexibility as it allows you to begin withdrawing money from the age of 55. A member can draw from a SIPP in stages, which allows them to draw on only a part of their fund and leave the rest untouched for the future. Pension Commencement Lump Sum The maximum tax-free lump sum that can be taken is 25% of an individual s fund up to the Lifetime Allowance (see later). In some circumstances individual members may be entitled to more than this amount if lump sum protection has been obtained. Income Options A SIPP offers the widest choice of options available when taking pension benefits. The pension can be secured by an annuity purchase or scheme pension or the pension can be paid from the SIPP through either capped drawdown or flexible drawdown. Any pension taken will be treated as earned income and is therefore liable to income tax. Annuity Purchase An annuity arrangement is where your fund, less any pension commencement lump sum, is paid to an insurance company which will then provide a set level of income for the remainder of your life. Capped Drawdown The amount of pension that can be taken via capped drawdown can vary each year between zero and the maximum amount that could be provided using the Government Actuary s Department s annuity rate applicable for the member. The maximum level of capped drawdown must be reviewed at least every three years and annually after age 75. Capped Drawdown allows the members to retain control of the assets. Flexible Drawdown Individuals that meet the Minimum Income Requirement (MIR) of at least 20,000 per annum will be able to drawdown an unlimited amount from their pension fund each year. Having entered Flexible Drawdown there will be no restrictions on the income the individual can draw. Flexible Drawdown allows the members to retain control of the assets. The income included for satisfying the MIR must be guaranteed and payable for life. The income that will count towards the MIR includes the basic State Pension, additional State Pension, level annuity income and scheme pensions. Scheme Pension Instead of purchasing an annuity with an insurance company or selecting Capped or Flexible drawdown, a member may elect for a Scheme Pension. This pension will be determined at the outset and may not be varied other than in extreme circumstances. The members retain control of the assets backing the Scheme Pension (and a dependant s pension) until death. The level of scheme pension is calculated by an actuary and will take into account the age, fund value, investment portfolio and a member s heath and in certain circumstances can provide a higher income.

8 Contact Old Mill If you would like to discuss anything in this brochure please contact us. Our cost of the initial consultation is borne by Old Mill and without obligation. Dorchester The Old Rectory, South Walks Road, Dorchester, Dorset DT1 1DT Tel: Fax: Exeter Leeward House, Fitzroy Road, Exeter Business Park, Exeter, Devon EX1 3LJ Tel: Fax: Melksham 4 Challeymead Business Park, Melksham, Wiltshire, SN12 8BU Tel: Fax: melksham@oldmillgroup.co.uk Wells Bishopbrook House, Cathedral Avenue, Wells, Somerset BA5 1FD Tel: Fax: wells@oldmillgroup.co.uk Yeovil Maltravers House, Petters Way, Yeovil, Somerset BA20 1SH Tel: Fax: yeovil@oldmillgroup.co.uk Find us on LinkedIn, Facebook and Twitter Please take a moment to read this important information The views and opinions contained in this document are those of Old Mill Financial Planning LLP at the time of going to print and the content is for general information only. It should not be relied upon without taking appropriate professional advice which will be tailored to your individual circumstances. Please contact your usual Old Mill representative or local Old Mill office. Old Mill Financial Planning LLP is an Independent Financial Adviser and is authorised and regulated by the Financial Conduct Authority. Registered in England No. OC The registered office for these companies is Maltravers House, Petters Way, Yeovil, Somerset BA20 1SH.