KEY GUIDE. Taking control of your pension scheme SIPPs and SSASs

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1 KEY GUIDE Taking control of your pension scheme SIPPs and SSASs

2 Introduction Self-invested personal pensions (SIPPs) are not a new concept, although you might think otherwise from the press attention they attracted. SIPPs first appeared in March 1989, less than a year after the launch of personal pensions. Until the pension tax changes introduced in April 2006, the use of SIPPs was largely confined to pension fund withdrawal plans and phased retirement. These two areas remain important applications for SIPPs, but their role has now widened considerably. The change to pension tax rules put SIPPs in the spotlight. In part, this was because SIPP contribution limits were effectively brought into line with what had been the much higher levels applicable to occupational pensions. The more flexible benefits available under the 2006 tax regime have also favoured the use of the SIPP structure. The origins of small self-administered schemes (SSASs) pre-date SIPPs. Although the two are now governed by the same tax rules, there remain technical differences which can be exploited. Self-invested personal pensions defined A SIPP is a special form of personal pension which allows the pension scheme member to choose and control the investments within their pension plan. SIPPs are offered by most of the major insurance groups and a range of specialist providers. Although SIPPs and SSASs are now governed by the same tax rules, there remain technical differences which can be exploited. The benefits that you can draw from a SIPP and the contributions that can be made are subject to exactly the same rules as an insured personal pension. The major difference between the two types of personal pension is that the SIPP has a much wider investment choice. If you were dissatisfied with the investment performance of the fund manager of a traditional insurance company s personal pension policy, there was nothing much you could do except transfer to a new provider. With a SIPP you can simply switch funds and fund managers often at the click of a mouse. SIPPs can no longer be used for contracting out of the state second pension (S2P). Small self-administered schemes defined A SSAS is a special form of occupational pension scheme, primarily designed for controlling directors of private companies. SSASs are offered mainly by pension consultants, but some insurance groups offer SSASs, often with links to their pension investment products. A SSAS s benefit and investment flexibility is very similar to a SIPP s, although strictly speaking the choice of investment rests with the trustees, not the member(s). SSASs are not used for contracting out. The investment choice The theoretical range of SIPP and SSAS investments is extremely wide. It includes: l Cash deposits in any currency. l Onshore and offshore investment funds, including hedge funds and exchange traded funds. 1

3 l Commercial property in the UK or overseas, including real estate investment trusts (REITs). l Listed and unlisted shares and fixed interest bonds, both UK and overseas. l Traded life assurance policies. l Warrants, futures and options. l Gold bullion. In practice, few SIPP providers offer the full range of possible investments. For example, some SIPPs limit your choice to collective investment funds and cash. These fund-based SIPPs look similar to individual savings accounts (ISAs), and some are run by ISA plan managers. If you want a broad selection of funds for your SIPP, but you are not interested in direct investment in stocks and shares, these fund-based plans are worth investigating. SSAS providers usually offer a wide investment choice, most notably including loans to sponsoring employers. Some forms of indirect investment in property and chattels are exempt from the tax penalty, but the definitions are strictly drawn. Taxable investments Up until December 2005, the Government had said that it would impose virtually no restrictions on what investments could be held within a SIPP or a SSAS. This prompted much speculation in the press about higher rate taxpayers using their pension arrangements to invest in vintage cars, fine wine, buy-to-let properties and Spanish villas. The then Chancellor responded to these scare stories by introducing special tax rules that apply to residential property and chattels, for example art, antiques and other collectibles. These rules make investment in residential property and chattels extremely unattractive from a tax viewpoint: the maximum tax charge can be 104% of the investment s value, most of which would fall on the member. Some forms of indirect investment in property and chattels are exempt from the tax penalty, but the definitions are strictly drawn. Unfortunately, the way in which the legislation operates potentially catches pension scheme investment by a controlling director in the shares of their unlisted company. While there is a limited exemption for indirect investment in chattels with a market value of no more than 6,000, many providers ban investment in chattels and member-related unlisted securities. However, some SIPPs and SSASs do permit investment in suitably structured residential property funds. Commercial property investment A major attraction of SIPPs and SSASs is that they can invest in commercial property which is let to the member s company or partnership. You can even sell a property owned by you or your business to the pension scheme (although this might result in a tax charge on any capital gains). Any sale transaction must use an arms length valuation, because there are tax penalties for value shifting. Similarly, the business must always pay a full commercial rent, which the SIPP or SSAS will receive tax-free. 2

4 A SIPP or SSAS can borrow up to 50% of its net assets for property investment (or any other purpose). For example, a SIPP with net assets of 300,000 could borrow 150,000 and spend 450,000 on a commercial property. Often SIPP and SSAS property purchase is financed by a combination of transfers from previous pension arrangements, new contributions and borrowing. SIPPs and SSASs that hold commercial property as an investment will normally have higher annual charges than simpler pension arrangements with investments in listed securities, collective funds and cash. SIPPs and SSASs that hold commercial property as an investment will normally have higher annual charges than simpler pension arrangements with investments in listed securities, collective funds and cash. Loans A SIPP cannot lend money to a member or anyone connected with the member. The no connection rule means that a SIPP cannot lend to the company of a director member. If pension-backed loans to an employing company are important, then a SSAS is the route to take. However, the company will have to provide full security for the loan, which must have an initial term of less than five years and be repaid in equal instalments of capital and interest. How we can help There are many SIPP and SSAS providers, offering a range of services. As independent financial advisers, we can provide advice on: l The choice between a SSAS and a SIPP. l The selection of a pension provider to meet your investment requirements. l The appropriate investment strategy within your SIPP or SSAS. l Transferring existing pension arrangements into your pension arrangement. l The use of a SIPP or SSAS in drawing retirement benefits. Levels and bases of, and reliefs from, taxation are subject to change. Past performance is not a guide to future performance. The value of your investment can go down as well as up, and you may not get back the original amount invested. This publication is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The Financial Conduct Authority (FCA) does not regulate tax advice, so it is outside the investment protection rules of the Financial Services and Markets Act and the Financial Services Compensation Scheme. This publication represents our understanding of law and HM Revenue & Customs practice as at 3 April

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