SIPPs

theGrinch

Please bear with me with these questions seem a little regulation, but Im sure others on this board will be aksing the same thing.

I have been reading up on SIPPs and in particular the SIPPs post April 2006, but I have a few questions and I would be grateful for your help.

1) I understand that you can include residential property in a SIPP from tax year 2006. Is this correct?

2) Can the SIPP borrow a mortgage on the same terms as can be done as an individual i.e. LTV?

3) I read that a SIPP can only borrow a maximum of 100% of the cash it has. is this correct? Can if borrow 100% of the asset value it has?

4) Is it correct the IR will supplement your SIPP with a top up at your prevailing tax rate?

5) Can you withdraw income or sell asssets and withdraw proceeds before the age of retirement and if so what are the limitations?

6) Can you transfer existing property into a SIPP? Is CGT payable? Is Stamp Duty payable?

7) How and where can you set up a SIPP? Will is be as easy as setting up a bank account, or do you anticipate it to require an accountant?

8) What other assets can a SIPP hold?

9) Is all income from a SIPP tax free?

10) Can you receive parental gifts into a SIPP on the same terms as currently prevailing?

11) can a SIPP be traded?

12) can you have more than one SIPPs holding different assets i.e. different risks?

thank you for your help.

dunstonh

1) I understand that you can include residential property in a SIPP from tax year 2006. Is this correct?

Yes

2) Can the SIPP borrow a mortgage on the same terms as can be done as an individual i.e. LTV?

3) I read that a SIPP can only borrow a maximum of 100% of the cash it has. is this correct? Can if borrow 100% of the asset value it has?

No.

From April 2006, trustees will only be able to authorise borrowings up to a limit of 50% of the total assets of the pension fund.

e.g. A £100,000 pension fund would only be able to apply for a £50,000 of borrowing.

4) Is it correct the IR will supplement your SIPP with a top up at your prevailing tax rate?

Potentially.

Contributions into the pension will receive tax relief as per usual. However, there are limits on how much you can pay into a pension per year and how much of that gets tax relief. If you earn £50k p.a. you can only get tax relief on the first £50k of contributions in that tax year. The amount above that would not get tax relief (upto the maximum of £215,000 in year 1)

5) Can you withdraw income or sell asssets and withdraw proceeds before the age of retirement and if so what are the limitations?

No. Benefits of the pension can be taken between age 50-75 although the rules changes to 55-75 from 2010. You can transact within the SIPP though but you cannot withdraw assets, unless you buy them out at market value.

6) Can you transfer existing property into a SIPP? Is CGT payable? Is Stamp Duty payable?

A property in a pension is not owned by you. It is owned by the pension trustees. Therefore, if you transfer the property, it is treated as a sale and purchase and all costs/taxes associated with that will apply.

7) How and where can you set up a SIPP? Will is be as easy as setting up a bank account, or do you anticipate it to require an accountant?

Accountants do not set up SIPPs. At this moment in time, SIPPs are not regulated by the FSA. However, most SIPPs need to be arranged by an FSA authorised advisor. These are mostly IFAs. There are websites that will do it cheaper (discount IFAs) than using an advisor but they will not offer you advice.

8) What other assets can a SIPP hold?

A vast magnitude of assets can be held within a sipp. From unit trusts, bonds, savings account through to a wine collection or classic car.

9) Is all income from a SIPP tax free?

It is free of personal liability to tax. However, the underlying assets may incur tax liabilities behind the scenes. (classic car still needs tax disc, unit trusts still have tax credit etc.

10) Can you receive parental gifts into a SIPP on the same terms as currently prevailing?

It would be split as two transactions. Receiving gift is one. Putting it in pension is another. The rules would apply to each one individually.

11) can a SIPP be traded?

A SIPP is just a tax wrapper. It has no value and cannot be traded.

12) can you have more than one SIPPs holding different assets i.e. different risks?

You can but there is no reason to do so. As it is just a tax wrapper, the idea of a wrap like this is to have one reference point for a range of investments you may hold. Many SIPP providers discount their charges depending on the value of the assets. In addition, it may prove to be more expensive to have multiple SIPPs as you will be paying SIPP management fees.

A SIPP can hold whatever you want and whatever quantity. For example, a wealthier investor may have a SIPP with 3 commercial properties, 2 houses, a crate of wine, 26 unit trust funds and a few cash holdings.

My personal view is that the cheapness of the SIPP shouldnt be a priority if you intend to hold assets other than unit trusts, especially property. The quality of the administration from the trustees and the co-operation they offer is going to be vital. My bet is that the best trustees will cost more than the poor ones. Remember the trustees own everything in the pension fund, not you. So you need to have trustees that will do things that you want and are willing to communicate and discuss things with you.

As a warning, the residential property in SIPPs is a high risk move. If you die, the trustees have to liquidate your pension fund. When you wish to commence benefits, they liquidate you pension fund. There may be delays with property and for those thinking of putting their own house in a SIPP, they may find their family being evicted by the pension trustees to sell the property. Of course, the family could buy the property but that would incur all the usual costs and the trustees would be looking for best price.

Everytime the property needs work on it, the trustees have to authorise it and they will arrange contractors to do the work. Expect fees for communicating with the trustees and expect contractors to be more expensive than what you would arrange.

meanmachine_2

To buy an average home in London @ £250K, as I understand it, you'd need £500,000 in your pension!!!

and why have all your eggs in one investment basket anyway? Particularly as we now seem to be tipping from a bull market into a bear housing market. Crazy.

Hasn't the stock market been massively outperforming property of late?

Titan

12) can you have more than one SIPPs holding different assets i.e. different risks?

Yes, you can have as many SIPPS as you like, but for the reason you mention it is best to just have investments in TIP units and then an investment manager for more risky investments.

However, once you start drawing benefits from your pension you may want to open a new SIPP to be able to contribute further to your retirement as once the total slots (normally 1000) are put in drawdown, you cannot contribute to that plan.

5) Can you withdraw income or sell asssets and withdraw proceeds before the age of retirement and if so what are the limitations?

You can take benefits before retirement rom age 50, this is one of the principal atractives that SIPPs have. Once your plan is put in drawdown you cannot cancel it and will need to take an amount of income between a minimum and maximum gad every year. Every 3 years this is calculated in order to keep it consistent with the fund, it is very much like an annuity but you still have control over your fund and if you die it wont disappear as annuities do... However after age 75 you need to buy an annuity.

7) How and where can you set up a SIPP? Will is be as easy as setting up a bank account, or do you anticipate it to require an accountant?

You can set up a SIPP with a number of providers, some will require that you have an IFA and others will let you set it up yourself. SIPPs are not easy to set up, specially since normally you will want to transfer your exisiting arrangements in (stakeholder pensions, PP..) and not all investments are allowed aswell as protected rights. So in some cases prepare to wait a few months... if there is a property involved you can even expect to wait for a year or more.

As indicated above, an accountant is not necessary.

8) What other assets can a SIPP hold?

There is a huge choice of investments, but they change depending on the trustees likes, some wont let you have certain properties and most wont let you have the vintage car or wines.

9) Is all income from a SIPP tax free?

It is as long as it stays within your pension, once you start drawing benefits then that income (what is paid out to you) is taxable.


Just a piece of advice, speak to an advisor before setting up a SIPP and make sure it is worth it, this is not a cheap "wrapper" so to speak, there are a lot of charges associated to a SIPP and they ad up pretty quickly.

A SIPP with a property can have pretty large annual charges (1k-2k) plus any charges your IFA takes plus any broker fees of any other investment and whatever solicitor charges are incurred for the management of your property.

Not the cheapest, but terribly cost efficient if your pension is over 200k approx.

Cheers

dunstonh

You can take benefits before retirement rom age 50, this is one of the principal atractives that SIPPs have. Once your plan is put in drawdown you cannot cancel it and will need to take an amount of income between a minimum and maximum gad every year. Every 3 years this is calculated in order to keep it consistent with the fund, it is very much like an annuity but you still have control over your fund and if you die it wont disappear as annuities do... However after age 75 you need to buy an annuity.

Just to clarify, the age 50 thing applies to all personal pensions and is being increased to age 55 from 2010. The drawdown option can be quite profitable but it can also erode your capital and leave you with a lower income post age 75 than an annuity would have done. Just ask anyone who did drawdown before the stockmarket crash and had a large stockmarket portfolio.

I dont want to keep coming over as anti drawdown as I am not. It can be a viable option for those with larger funds. However, the potential down sides do often fail to be mentioned.

There is a huge choice of investments, but they change depending on the trustees likes, some wont let you have certain properties and most wont let you have the vintage car or wines.

I posted that on reference to a recent chat with my Standard Life rep who informed me that they were two items that they have lined up to go into a SIPP with someone. My point was to highlight the extreme options you have with investment choice.

deemy2004

Sipp pension drawdown is the way to go

You get your 25% lump sum tax free whilst your pension can grow and you can withdraw income of betwen 35% and 100% of the annual GAD figure based on age etc...

Much better than buying a once and for all annuity !

This way you can delay the dreaded annuity until 75.

So you can phase your retirement... take less income in your 50's / early 60's and let the capital grow.

Take out that lump sum to go cruising in your 50's / 60's whilst your not limited to a zimmerframe ! as you maybe later in life !

Pal

Alternatively you can do income drawdown and watch your pension policy fall in value up to the age of 75, before you buy a smaller annual annuity to live the rest of your life on. But never mind. You can always sell your house to cover your long term care fees.

It never ceases to amaze me how many people who clearly don't understand annuities come on here and spread complete rubbish about SIPPs and income drawdown because they think it makes them sound clever. Persumably the same posters are over on the insurance board advising people that house and car insurance is a waste of money because it is money down the drain and you can't leave the premiums you have paid to your children?

Please guys (you know who you are, and it isn't just this thread), go to Motley Fool and join the other misguided souls who fancy themselves as investment experts. If you want to gamble your money by investing it then that is entirely up to you. The rest of the world, particularly the older generations, needs bond based insurance products that will provide them with a guaranteed income for the rest of their lives, which these days could be for a very long time.

deemy2004

It never ceases to amaze me how the 'quote' know it best crowd i.e. advisors / pensions experts all end up costing the consumer money ...

Good for following the herd ...... yeh right over the pensions cliff....

If your going to do something then do it yourself don't put your future in the hands of so called experts who are ONLY out for themselves ... !!!!!! do they care about what happens to a policy, fund or pension they sold someone 20 years ago !!!!!!

Theyve got their commission and or off to fleece the next mug....

Educate yourselves KNOW where your putting your money and WHY !! Don't go baaah baaah like sheep to the financial slaughter yard.

Offcourse the so called experts want people to be and behave like sheep makes them easier to fleece ....... .. Any product that takes them out of the loop such as SIPS will be jumped upon with vigor and venom for there is not one penny in it for them...

Passing a !!!!!! easy exam in a few months does not exactly equate to years of hands on experience ......

klondyke

"However after age 75 you need to buy an annuity" ?

I understood that one of the possible benefits of A-Day, was that you no longer have to buy an annuity at 75, but have to have an Alternative Secured Pension involving some drawdown.

Is there any clear information yet as to how that works and what percentage is compulsory?

(Mr K, 71, has a pension pot around 90-100k. Has not taken out an annuity as we don't really need the income. (With hindsight and watching pot and annuity rates fall, maybe that was a wrong decision, but....). As things stand, if he pops his clogs before reaching 75, as the pot is written in trust, our children will get it free of IHT.

I gather that under new rules, they still haven't decided what, if any, IHT charge there would be on the pot value after age 75. I suppose we're best sitting on our hands for the moment or should he establish the mysterious ASP ASP (!) - any views from the experts?

Pal

deemy2004 wrote:

It never ceases to amaze me how the 'quote' know it best crowd i.e. advisors / pensions experts all end up costing the consumer money ...

Good for following the herd ...... yeh right over the pensions cliff....

If your going to do something then do it yourself don't put your future in the hands of so called experts who are ONLY out for themselves ... !!!!!! do they care about what happens to a policy, fund or pension they sold someone 20 years ago !!!!!!

Theyve got their commission and or off to fleece the next mug....

Educate yourselves KNOW where your putting your money and WHY !! Don't go baaah baaah like sheep to the financial slaughter yard.

Offcourse the so called experts want people to be and behave like sheep makes them easier to fleece ....... .. Any product that takes them out of the loop such as SIPS will be jumped upon with vigor and venom for there is not one penny in it for them...

Passing a !!!!!! easy exam in a few months does not exactly equate to years of hands on experience ......

The problem with Editor and yourself (and numerous others who flock to the SIPP/anti-annuity cause) is that you really fail to understand two important points:

- The vast majority of retired people do not want any risk to their income;
- The vast majority of people do not understand financial products enough to be able to profit from their savings.

I completely agree that, in an ideal world, everyone would educate themselves to a standard where they would be able to make use of SIPPs and income drawdown. But we do not live in that world. In practice most people, given control of their own investments, will lose money. This is because they don't know what they are doing, and they are competing with teams of professionals employed by very large, well resourced companies.

Then you lot come along, with a bit of knowledge of SIPPs but almost no knowledge of annuities and what they do, and attempt to convince others to take a route that, IN ALMOST ALL CASES, will result in their losing money.

You come out with glib statements like "Annuities are poor value compared to 10 years ago" while also advising people to invest in cash ISAs, which are also poor value compared to 10 years ago. You obsess over the fact that you cannot leave an annuity to your family, while ignoring the fact that guarantee periods can be bought of up to 10 years and that spouse's pension options can be obtained. You never mention that home insurance is a waste of money if you house never burns down or you never get burgled, and yet the same principle applies.

You ignore the fact that annuities are bond linked insurance policies, and so investing in anything other than an annuity passes the longevity risk back to the individual, and making a profit above what an annuity would provide involves taking additional investment risk or dying early, both of which are generally unpopular with retirees.

I have no problem with your wanting to avoid purchasing an annuity yourself, but please stop misinforming others about them when it is clearly the most appropriate product for the vast majority of people. Remember that most people are not as financially educated or astute as you are. I also think that you should spend some more time studying insurance, mortality and the financial consequences of severe poverty in very old age. Annuities are not "bad value" at the time they are purchased. They can turn out to be poor value if the holder dies early and did not organise guarantee periods or spouse's pensions, but with reasonable advice that sort of scenario should be avoided. And in any case, the problem now is that most people are living longer, not dying earlier.

As a final point: the exams I passed took about 4 years to achieve (which was pretty quick if I say so myself), and are not the standard financial advice exams. I do not make money from annuities, do not advise individuals on annuity purchases, and have nothing to gain whatsoever from my stance that annuities are a good idea for the vast majority of people. However I have spent a lot of time working with company pension schemes where the various risk issues surrounding annuities, mortality risk pooling and the corporate equivalent to drawdown are analysed in great detail.

EdInvestor

EDIT BY PAL - BOARD GUIDE

With sincere apologies to Editor, but I totally managed to mess up his post. I went to hit "quote" to respond to the points he posted here, and managed to hit "Edit" (a board guide button) instead without realising. I then typed out my response (now later in this thread) and managed to overwrite his post with mine. <Embarrassed smiley>

If Editor wants to replace his post here then please go ahead and edit this, otherwise Dunston and I have quoted some of his original post in our posts below this one.

Just to reiterate, this was a stupid error on my part and there was nothing wrong with editors post. (I disagreed with most of it but it didn't breach the rules or anything).

SORRY!!!!