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SIPP Rules and Their Advantages

May 02, 2017

Richard Beardsworth Pension Expert

By Richard Beardsworth.

Independent Financial Advisor

Often referred to as the ‘DIY pension scheme’, the self-invested personal pension (SIPP) offers pension holders the ability to make their own investment decisions. It is approved my HM Revenue and Customs (HMRC) and provides the ideal solution for anyone looking to start a portfolio that showcases a variety of investment types.

Below are just some of the types of investment that SIPP rules allow:

  • Cash
  • Shares
  • Unit trusts
  • Investment trusts
  • Commercial property
  • Gilts and corporate bonds
  • Exchange traded funds (ETFs)
  • Open-ended investment companies (OEICs).

What Else Makes a SIPP Different to Other Pension Types?

Putting aside the ability to invest in various forms of asset types, one of the biggest differences between a SIPP and the more commonplace pension (occupational, stakeholder, etc.) is the way income is taxed. For example, if you are a worker investing in an occupational pension, you would use pre-tax funds. This means the money would be deducted from your pay and added straight into your pension pot before your income taxes have been assessed.

As a SIPP investor, you would contribute your income to your pension fund away from the workplace, and therefore any contributions you make would be taxed as salary. You would then receive a tax rebate from your pension provider.

Are There Any Significant Tax Advantages?

SIPPs offer a number of tax advantages that continue to attract new investors, giving them far greater freedom than the more standardised types of pension available today.

Firstly, the latest SIPP rules mean you can start withdrawing funds from your SIPP from the age of 55. The first 25 per cent of the withdrawal is tax-free, and the remaining 75 per cent is counted as income in the same year you receive it and is therefore taxed at your marginal rate.

When it comes to capital gains taxes, SIPP rules enable you to make contributions without having to fork out excessive capital gains liabilities. This is due to the fact that UK pensions are not subject to capital gains taxes on any money earned.

Although not the lightest subject, it is important to consider what will happen to your funds once you are no longer here, no matter what type of investment you decide on. SIPP rules state that any money remaining in your pension pot will be passed on to your beneficiaries free of inheritance tax and if you die before the age of 75, no income tax will be assessed. If you die after the age of 75, any remaining funds will be taxed at the beneficiary’s marginal rate.

SIPPs have been designed to increase your retirement income while giving you maximum control over your funds. However, as with all pension schemes, this is not a ‘one size fits all’ solution, and it might be that a SIPP isn’t the best way forward for you and your life savings. Ensure that you investigate all the SIPP rules, regulations, and options fully before you decide to take the next step.

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