1 TD Direct Investing A Guide to SIPPs
2 Introduction If you are considering investing for retirement, there are a number of ways to approach it. One way is to embark on the do it yourself (DIY) self investment journey using a Self Invested Personal Pension (SIPP). The DIY approach means making your own investment decisions to build up a pension fund to support your income needs in retirement, in addition to any state retirement benefits you may be entitled to. It is crucial to note that self-direct investing may not be suitable for everyone. If this is the option you are considering, this guide will equip you with information about how a SIPP works in practice, and will help you decide whether this type of pension might be right for you. Other sources of important information are available on our website to help you understand whether a SIPP is right for you including the Key Features Document of the TD SIPP, our SIPP Terms of Service and Rates and Charges. You can also produce a personalised illustration that will provide you with more information about the amount of pension you may receive at retirement. After reading this information you may be entirely comfortable making all of your own investment decisions for retirement or you may conclude that financial advice would be beneficial before you decide which pension option is right for you. You can also download our Guide to Pensions to read more information about the options available when investing for retirement. TD Direct Investing does not provide advice. This e-guide is intended for educational purposes only and as such is not a solicitation or personal recommendation to make an investment based on the content of this guide. Investors should be aware that the value of investments held in a SIPP can fall as well as rise and are not guaranteed. You may get less back than the amount invested which may affect the value of the income you receive in retirement. If there is any doubt over the suitability of a particular investment then you should seek independent advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. It is recommended that specific tax advice, where required, is obtained from HM Revenue and Customs (HMRC) or a qualified tax adviser.
3 What is a SIPP? A SIPP is a Self Invested Personal Pension designed to help you build an investment portfolio, which is then used to provide you with an income when you reach retirement. It provides the same tax efficient wrapper as other types of pensions, but offers you the freedom to make your own investment choices. The SIPP was introduced in 1990 when the government recognised that people investing for their retirement were looking for greater control over their investment choice and scope to invest in a wider range of investments than were traditionally available through personal pension schemes. Why is a SIPP different to other individual pensions? If you are setting up your own pension then the options available are stakeholder pensions, personal pensions and SIPPS. Stakeholder pensions are typically offered by insurance companies, have low costs and a limited fund range. Personal pensions can also be offered by insurance companies. Fund choices are often limited to the insurance company s own funds although some insurers have now extended the range of funds available to include external fund managers. SIPPS offer the most flexibility and control when it comes to allowable investments and are one of the few pensions which allow you direct access to equity markets both in the UK and overseas. It provides the same tax efficient wrapper as other types of pensions, but offers you the freedom to make your own investment choices.
4 Investing within a SIPP What investments can I hold in a SIPP? HM Revenue and Customs (HMRC) allow a wide range of investment types within a SIPP, however you need to be aware that not all SIPP providers offer all investment types through their own products. For details of the investment types available within a particular SIPP wrapper you can look at the provider s website and product literature which should provide more information. For the most part SIPPS offer access to UK Equities, Overseas Equities, Investment Trusts, Unit Trusts and OEICS. Some, but not all providers offer access to AIM Shares, Warrants, Exchange Traded Products, REITS, Fixed Interest Stock, Cash and Government Gilts. Another thing to note is that not all SIPP providers offer direct exposure to overseas exchanges for trading. Some providers may only offer the London Stock Exchange s International Retail Service. This enables you to trade in overseas stocks in sterling via the Crest system, but there is a limited amount of companies available. There are few restrictions on the type of investments that HMRC will allow in a SIPP, but certain types of investment may attract a tax charge. Residential property is a good example of this. More expensive bespoke SIPPS offer exposure to different investment options such as direct ownership of commercial property, unquoted shares or gold bullion. Tax Efficient Investing A SIPP is a tax efficient pension wrapper that allows you to retain more of the investment returns for yourself. Most of the investment returns that accrue in a SIPP are free of capital gains tax and income tax. This allows your pension fund to grow more quickly than if it was invested outside of a pension wrapper. The main exception is the 10% tax credit that is deducted from UK company dividends, which cannot be reclaimed.
5 Investing within a SIPP Can I have a SIPP and another pension? There is no limit on the number of pension plans you can hold. You can open a SIPP in addition to your existing pension with another provider or your employer. The only restriction is on the level of contributions that you can pay into your various pension plans in any one year and the amount of pension fund that you can build up in your pension plans over your lifetime. Who can hold a SIPP? Any person who is UK resident and is under 75 years old can open a SIPP. The account can run alongside an employer s pension scheme if you want to make additional contributions or serve as a standalone alternative for those such as the selfemployed.
6 Investment Amounts How much can I contribute to a SIPP? There is no actual limit on the amount you can put in a SIPP each year but there is a limit on the contributions you can pay into all your pension schemes and receive tax relief. You can receive tax relief on your personal contributions up to 100% of your earnings or up to the annual allowance, currently 50,000 - whichever is the lower. The annual allowance will be reducing to 40,000 with effect from the tax year 2014/15. Although the limits have reduced in recent years, and this may add complexity, the contribution threshold is usually sufficient for an individual to contribute what they need to ensure a comfortable retirement. If you have no UK earnings, or are earning less than 3,600 a year you can still pay in contributions up to 2,880 (net) and the SIPP can claim back basic rate tax relief of 720 from HMRC. If you think your contributions will exceed the annual allowance in any year, you will be able to use any unused allowance from the previous three tax years to offset against the excess contributions, assuming you were a member of a pension scheme throughout that period. If you use up the current year s allowance, plus any allowance available from the previous three years, and still have excess pension savings over the allowance then a tax charge will be applied. There is also a limit to the amount you can accumulate in your pension schemes during your lifetime without triggering additional tax charges when benefits are taken. The Lifetime Allowance is currently 1.5 million and does not include your entitlement to state pension. The Lifetime Allowance will be reducing to 1.25 million with effect from the tax year 2014/15. Those who already have a pension fund that exceeds this amount, or expect it to by the time they take their benefits can apply to Her Majesty s Revenue and Customs (HMRC) for protection from the additional charges.
7 Investment Amounts How does tax relief work? The whole premise of the UK pension system is that you should only be taxed on earned income once. This is achieved by providing tax relief on pension contributions made from taxable income, which effectively defers the tax charge until you retire and draw an income that is then subject to income tax. In some cases you might end up paying a higher or lower rate of tax in retirement than during your working life, but on the whole this is considered a way of encouraging you to lock away your income over your working life so that you have access to it when you reach retirement. This means that if you make an 800 contribution you would see your SIPP topped up by an additional 200 by the government. Only those who are relevant UK individuals can claim tax relief on their pension contributions. Generally, to qualify as a relevant UK individual you need to be: n under the of age 75 n have relevant taxable UK earnings for that year n be resident in the UK for at least part of the tax year n or be resident in the UK at some time in the previous five tax years including at the point that you joined the pension scheme. All the allowable contributions paid into a SIPP are effectively made from after taxed income. The administrator of the scheme then claims the 20% basic rate rebate direct into the fund. This means that if you make an 800 contribution you would see your SIPP topped up by an additional 200 by the government. Higher rate taxpayers can claim back the additional tax via their annual self assessment tax return. This can be attractive to those whose income is at the margin between basic and higher rate tax brackets, because the extra relief works by expanding your basic rate tax band by the amount of the gross pension contribution.
8 How do I contribute to a SIPP? Up until the age of 75, you can pay one-off or regular contributions into your SIPP to take advantage of the tax benefits available. Contributions can also be paid by another person on your behalf such as your spouse or partner, a parent or grandparent and treated as your own personal contributions for tax purposes. If you are employed, your employer can pay contributions into your SIPP, however you may find that your employer will only pay contributions into a pension scheme that they have arranged on your behalf. If you are employed, your employer can pay contributions into your SIPP...
9 Is a SIPP right for me? A SIPP could be right for you if you want access to wider investment opportunities, such as access to a range of professionally managed funds or investment in a portfolio of UK and International equities and want to be self-directed in your investment choices. It might not be suitable for you if you are only likely to need access to a limited range of investments, such as those available under an insurance company personal pension or stakeholder pension plans. If you have any doubts about the suitability of a SIPP for your own personal circumstances you should contact a suitably qualified financial adviser.
10 How do I start investing in a SIPP? It can often be difficult to compare one SIPP with another due to the wide variety of schemes available. All have different costs and offer different investment choices, but if you are looking for a low-cost SIPP that you can access online then this can considerably narrow down your choices. The SIPP you choose will generally depend on what investments and markets you want to invest in and how actively involved you want to be with the investment decisions. A number of SIPP providers are only able to offer you a SIPP if you have received advice from a financial adviser. If you are deciding to go-it-alone then you will need to be able to manage your SIPP online, together with access to research and tools that allow you to test your investment approach. It is possible to transfer most existing pension plans into a SIPP. Can I transfer in from another pension? It is possible to transfer most existing pension plans into a SIPP. You will find that most SIPP providers no longer accept transfers in from final salary pensions, as for the most part you would normally be giving up valuable benefits from a final salary pension that are hard to replicate by investing in a SIPP. It is not normally possible to transfer in pensions from overseas schemes either. A useful service to be aware of is the government tracing service that allows you to find any pension schemes that you may have lost track of. The service is available from It is usually a good idea to start by requesting a transfer valuation from your existing pension provider that will provide you with an up-to-date value of your pension together with details of any penalties or charges that might be applied on transfer. You can choose to transfer your pension in the form of a cash payment or alternatively you can transfer the assets you already hold, providing these assets are available for investment in the SIPP product you choose.
11 How do I start investing in a SIPP? Whilst there may be benefits to transferring an existing pension scheme into a SIPP it may not always be beneficial to do so. Before transferring to the TD SIPP you should check the following: n n n n whether your existing provider will make a charge for transferring out or charge a transfer penalty whether you will lose any valuable benefits, such as guarantees or bonuses, or the potential to take a higher level of tax-free cash than the standard 25% of your pension fund whether your policy offers guaranteed annuity rates. Guaranteed annuity rates will often allow an individual to obtain a higher level of income at retirement than might otherwise be available. You may lose a valuable benefit if you transfer out from a scheme offering guaranteed annuity rates. For example, some providers offered guaranteed rates in the region of 10% - considerably higher than the rates generally available in the market now whether any market value adjustment (MVA) may apply on transfer from your existing provider. This may be the case if you are invested in a With Profits fund, which could result in the reduction of the value of your pension fund available n n to transfer. Some providers offer MVA-free dates when it is possible to transfer without the penalty applying if your employer is contributing to your current pension scheme you will need to check whether they will be prepared to contribute to a SIPP instead if you belong to a certain occupation, such as a sportsperson, your existing pension may give you the right to take retirement benefits earlier than age 55 (known as a protected pension age). This benefit would be lost on transfer to another pension scheme If you are unsure whether you should transfer your existing pension, you should seek advice from a suitably qualified financial adviser. Can I transfer in other investments? If you want to use some of your existing share holdings to make a contribution into a SIPP, you cannot move your shares directly into a SIPP. It is possible, however, to sell and repurchase your shares through a process known as Bed and SIPP. The cash amount used in the Bed and SIPP transaction counts as a personal contribution and is eligible for tax relief.
12 SIPPs and Financial Advice Although a SIPP is self-directed, if I need advice can I take it? And can I pay for advice from my pension plan? Whilst you may be considering a SIPP to enable you to take control and manage your own investments for retirement, you may want to consider taking advice at important key events through the lifecycle of your SIPP. For example when you want to transfer in an existing pension plan and particularly when you are considering taking retirement benefits. You can ask some SIPP providers to make payments for this advice to your financial adviser on your behalf from within your SIPP, although this is a service that is not available from all providers, so you should check before making any financial arrangement with your adviser.
13 What happens when I retire? As you reach retirement there will be a number of important decisions that you will need to make. What sort of lifestyle are you looking for in retirement? How important is it for you to have a secure pension income that you can rely on, or do you have other sources of income to support you in retirement? Do you need an income for your spouse or partner as well? You may find that you do not need to take all of your pension benefits at one time. You may still be working part-time and only need part of the income available to you to top up the salary you are drawing, or you may have other income that you can draw on in retirement. So where do you start? Once you have considered your needs in retirement you will have a number of options as to how you take your pension benefits. Lump Sum Payment However you choose to take your pension benefits you normally have the option to take up to 25% of the value of your pension or your lifetime allowance (if lower) as a tax-free cash lump sum at the point you decide to take benefits. Income Options Once you have decided whether to take a lump sum, the funds remaining can either be passed to an insurance company of your choice to purchase an annuity or be used to provide you with a drawdown pension directly from your SIPP.
14 What happens when I retire? Lifetime Annuity Purchase A Lifetime Annuity is a regular taxable income that you will get for the rest of your life. Lifetime Annuities are purchased from an insurance company of your choice using your pension fund; your pension provider will pay your funds to the insurance company, who will provide you with your income. You will need to make a number of decisions about the annuity you purchase at the outset, such as whether to include a pension for your spouse or partner when you die. The annuity rates offered by insurance companies can vary considerably, so it is important that you shop around before making your choice. The FCA s website allows you to compare the annuities available to you, or you could seek advice from a suitably qualified financial adviser. Drawdown Pension With a Drawdown Pension your funds remain invested in your SIPP and you continue to manage your investment strategy. Income is available to you usually up to a maximum level (broadly in line with the income you could receive from an annuity) providing you hold sufficient cash to make the payments. Capped Drawdown Capped Drawdown is a method of drawing an income directly from your fund from age 55 and throughout your retirement. There is no upper age limit for drawing benefits, so if it suits your circumstances you can choose to defer taking an income to some time in the future with no age restriction. Your funds will remain invested and you continue to manage your investment strategy. Income is available to you up to a maximum level. This is broadly in line with the income you could receive from a lifetime annuity. Flexible Drawdown Flexible Drawdown is a form of drawdown pension that can be taken from age 55. Income is drawn directly from your SIPP (which continues to be invested) and there are no limits on the amount of income you can take. Flexible Drawdown is only available if you can demonstrate that you have a guaranteed income of at least 20,000 per annum from other sources such as state pension, a lifetime annuity or final salary pension (known as a Minimum Income Requirement).
15 What happens when I retire? Potential Disadvantages of Pension Drawdown It s important to note that if you start to take benefits earlier than you originally intended, the level of the benefits you can take may be lower than expected and may not meet your needs in retirement. Also, remember that income withdrawals can erode the capital value of your fund. If investment returns are poor and a high level of income is taken this will result in your pension falling in value and could result in a lower income than anticipated in the future. If you choose an annuity to provide your benefits, the level of income you receive is based upon the average life expectancy of someone your age. When fixing annuity rates, providers take into account the fact that some people will die earlier than expected, effectively subsidising those who live longer. Income withdrawals paid from a SIPP do not have the benefit of such a subsidy. There is no guarantee that annuity rates will improve in the future. If you choose to purchase an annuity, the level of pension you receive when you purchase the annuity may be less or greater than the amount previously being paid through income withdrawals and/or the annuity you could have purchased previously. Your pension may be subject to additional tax charges at the point you withdraw funds if your pension is valued at more than the lifetime allowance (see our website for the current level of the lifetime allowance). This is subject to change in the future. If you have a small SIPP and no other assets or income to fall back on the financial impact of these risks may be greater. Your own individual circumstances should be taken into consideration when deciding how to take your retirement benefits and you should seek advice from a suitably qualified financial adviser before purchasing an annuity or entering into either capped or flexible drawdown. Also, remember that income withdrawals can erode the capital value of your fund.
16 Death Benefits Will the retirement option that I select have an impact on what is available to leave as an inheritance? If you die before taking any benefits from your pension before reaching age 75 then there usually is no tax to pay on the lump sum payment available to your beneficiaries, including no inheritance tax (IHT). Once you reach age 75 there will usually be no inheritance tax to pay on any lump sum, but there will be a recovery tax charge of 55% applied to your pension. This means that your dependants should be able to receive a lump sum of up to 45% of the value of your pension. Alternatively it may be possible for your dependants to draw an income direct from your pension or purchase an annuity with the funds. Income tax will usually be payable on the income but the recovery tax charge will not apply. Once you ve started taking benefits from your pension, the death benefits payable will depend upon the benefit option you ve chosen. If you choose to purchase an annuity, the death benefits available will depend on the type of annuity that you have purchased from the insurance company. If you choose a single life annuity with no form of guarantee there will be no lump sum payment when you die and any funds left will remain with the insurance company. If you opt for a Drawdown Pension, the recovery tax charge of 55% will be applied to any lump sum paid from your pension on death. Again, it should be possible for your dependants to avoid this charge by taking an income from your pension or by purchasing an annuity, which will be subject to income tax instead. If you don t have any dependants you will be able to pass on the value of your pension tax-free to a charity of your choice. It is possible to gradually move into a Drawdown Pension so that you only take benefits from part of the fund. If you don t need all of the tax-free lump sum at the outset, or are looking to take a lower level of income than the maximum, then you may want to consider taking benefits from only part of your fund, as the remaining fund can then be paid free of tax on death before age 75.
17 In summary Both SIPPs and ISAs are useful products that can be used to save for the future in a tax efficient way. The main difference is that with a SIPP your savings are locked away until you reach at least age 55 and are designed to support you in retirement. Saving in an ISA is a natural way to complement long term savings goals, as access to your funds is available whenever needed, although you should remember that ISA investments, particularly in stocks and shares, are designed for the medium to long term. You can also download our Guide to ISAs to read more information about the options available when investing in ISAs. Once again, it is important to stress that the tax treatment of these products depends on the individual circumstances of each customer and may be subject to change in the future. If you have any doubts about the suitability of a SIPP or you need further advice, you should seek advice from a suitably qualified financial adviser. If you would like to continue your SIPP fact-finding journey, please visit for more information.
18 Legal Disclosure Brokerage Services provided by TD Direct Investing (Europe) Limited (a subsidiary of The Toronto-Dominion Bank). Incorporated in England and Wales under registration number Registered office: Exchange Court, Duncombe Street, Leeds, LS1 4AX, United Kingdom. Authorised and regulated by the Financial Conduct Authority, 25 The North Colonnade, Canary Wharf, London, E14 5HS, United Kingdom (Financial Services Register Firm Reference Number ), member of the London Stock Exchange and the ICAP Securities and Derivatives Exchange. VAT Registration No Banking Services provided by TD Bank N.V. Incorporated in the Netherlands and registered as a branch in England and Wales under branch registration number BR Authorised by the Dutch Central Bank (De Nederlandsche Bank DNB Institution Number 481) and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority (Financial Services Register Firm Reference Number ). Details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request