A SIPP is a type of personal pension in which you have control of where (and how) your money is invested.
Both you and your employer can make regular and one-off payments into your SIPP. If you are a business owner or entrepreneur working for yourself, you can make both personal and employer contributions – doing so can bring business and income tax advantages.
You can contribute as much as you wish to your SIPP, but only the annual allowance will benefit from tax relief. The annual allowance is different for everyone, though most have an allowance of £40,000, with that number reducing for those with higher incomes (like our clients). Anything you pay into your SIPP beyond your personal annual allowance will incur tax. There is also a lifetime allowance at play (currently £1,073,100), though this is subject to change.
If you are a self-employed business owner or entrepreneur, the specific rules of your SIPP can vary depending on the type of company you own (for instance, sole trader or limited). This can be complex, so it is also better to speak with a Chartered Financial Planner before taking any action.
Paying into a SIPP can offer more flexibility in your pension and retirement options. This is because you have increased choice over what happens with your money, including how you take your funds out, and how your funds are invested.
With the State pension only just covering what research suggests is the minimum amount to cover basic needs in retirement, it is important to consider additional pension options.
With SIPPs, you can make your own contributions, and you don’t need to pay in huge lump sums. Paying into a SIPP can therefore help to increase retirement income by allowing you to invest little and often, all working towards an additional pension pot.
Alongside optimising your National Insurance contributions, opening a SIPP is one option for self-employed business owners, high net worth individuals and entrepreneurs. This is because SIPPs allow flexible contributions (accounting for income fluctuations), provide tax benefits (including tax relief at 20% and contributions made from pre-taxed company income, dependent on circumstances), and tax-efficient growth (no Income or Capital Gains Tax is due on any investment growth or dividends).
What are the potential risks?
When it comes to Self Invested Personal Pensions (SIPPs), there are several risks which should be considered. This includes: investment value can fluctuate, payments from your SIPP are subject to income tax, after 75 years of age lump sum payments made of your death will be liable for tax, and if you withdraw too much from your pension you may erode the capital in your SIPP.
After discussing your goals and specific circumstances, we will discuss flexible ways you can save for retirement. A Self-Invested Personal Pension (SIPP) is one way we may plan to do this.
One big advantage of having a SIPP when you are an entrepreneur or business owner is that it is possible to hold business property inside one. You could purchase your own business premises and hold it inside your SIPP or purchase property occupied by a third party. We consider this complex benefit alongside others, the risks, and your personal situation when planning to use a SIPP.
If we conclude that a SIPP is right for you and your plan, it will become part of your wider retirement plan.
You may not be able to do this, but you can use your SIPP to purchase commercial property which is associated with your business (such as your office).
The answer is different for everyone, depending on income, pension pots elsewhere, standard of living, investments, etc.
The important thing is to find out ‘Your Number’. A Chartered Financial Planner can help you do this.
You can nominate someone to receive your SIPP if you pass away. This includes your spouse, children, grandchildren, and beneficiaries who are unrelated to you. You may also choose to leave some (or all) of your SIPP to charity.
There are also certain tax rules about the inheritance of a SIPP which you should speak to a Chartered Financial Planner about.
The number of holdings in your SIPP will depend on your experience and the size of your portfolio. There is no exact science.
Speak with your Chartered Financial Planner first.
There are several disadvantages or risks to using a SIPP. These include but are not limited to:
SIPPs are suitable for experienced investors with financial flexibility; if you do not have these things, a SIPP may be unsuitable for you.
There are no promised returns.
These disadvantages are often associated with mis-selling of SIPPs. This is one of the many reasons why it can be beneficial to have the support of an experienced Chartered Financial Planner.
There are no limits to the number of SIPPs you can have. But it is important to remember that there are currently limits to annual and lifetime contributions regarding tax efficiency in your pensions.
They work in a similar way, but SIPPs can be more flexible and offer more control over investments than pensions.
The maximum annual allowance for SIPP contributions is £60,000 or 100% of your annual income up to that value.
Tax relief is one of the biggest benefits of a SIPP.
You receive tax relief on your SIPP contributions where the government tops up any money you pay into your SIPP and other pensions by 20%. And higher and additional-rate taxpayers can also claim a further 20% and 25% respectively via self-assessment.
Though this tax relief is limited by your annual earnings and the current pension annual allowance.
In addition to this, investments in SIPPs grow tax-free from income tax and Capital Gains Tax.
You are in control and can make changes and additions to your investments as often as you need.
You can save a lump sum into your SIPP but will likely need to contact your pension provider to do this.
Contacting your provider is something your financial planner can do for you.
You can have both a SIPP and a workplace pension – and you can contribute to both at the same time.
The use of both options may or may not be right for you depending on your personal circumstances.
As with many other pension options, you can take a tax-free lump sum of up to 25%. You can then use the rest as taxable income.
You may also take a number of lump sums.
And, depending on what else you have drawn, the first 25% of each cash withdrawal will likely be tax-free.
The fees you pay for your SIPP depend on the provider you choose, and the rate they charge for someone in your circumstances.
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