How do I get a Sipp Pension?
The answer is, as always, get an independent financial adviser. And then, as always, compare this advice with advice from another adviser and then with what non-advice firms are saying. Finally, scour the internet for news and views.
Does all this sound too much? Well, it isn’t because this is a really serious decision and needs more time and care than buying a bottle of wine.
A large number of specialist investment firms and insurers offer Sipp products that will allow taxpayers to take out a self-invested personal pension and, like all investments, it’s worth shopping around to make sure you are getting the one that will suit your needs best.
Many firms will charge to set up a Sipp and many will also levy an annual administration fee.
There will also probably be separate fees to pay for each of the investments within a Sipp.
Some companies are offering low cost Sipps without a set-up charge or an annual fee, but while these might be attractive, it’s also worth checking and comparing the fees for the other parts of the Sipp to see whether the initial savings might be cancelled out by higher fees later on.
Although Sipps are marketed as ‘do-it-yourself’ products, they are legally quite complex. They are pension plans and require full regulation.
Read More on Sipps Pensions
What can you put into a SIPP pension?
Benefits and advantages of Sipps Pensions
How do I get a Sipp Pension?
Will I still have to buy an annuity?
Can it help me avoid inheritance tax?
Will I still have to buy an annuity?
For most people the answer will still be yes, but the system is flexible and those who can afford to live on a reduced income will be able to avoid buying an annuity – at least until they reach 75.
And if you can put it off as long as you can, you might be lucky and some government will either abolish the rule that makes annuities almost compulsory – or at least increase the age limit to 80.
It is possible to draw down the funds from your Sipp at any time between the ages of 55 and 75.
The Sipp holder will be able to take out up to 25 per cent of the fund as a tax free lump sum just as with any other pension.
After the tax free lump sum, most people are likely to use the rest to purchase an annuity.
But what a Sipp can do well due to its flexibility is serve as a base for an income drawdown strategy. This involves you getting an income from your pension pot before you commit yourself to an annuity. It’s not a guaranteed winner and some drawdown investors have lost heavily.
You might also consider, along with your IFA, buying a so-called “third way “ annuity. These are very complex but, put simply, they give you two bites at the annuity cherry – one when you retire and a second when you reach 75.
Yet another choice is the Alternative Secured Pension, which will allow a Sipp holder to continue to draw down income from their fund. In some circumstances, this can avoid the annuity purchase altogether and be able to leave the pension pot in their will to their family.
Sounds like a great deal? Well, there are so many rules and so many tax clawbacks that the ASP is only suitable for a tiny minority of people.
The drawback of this method is that the maximum payments after 75 will be equivalent to about 70 per cent of the value of an annuity, meaning that it will only be suitable for those who are able to afford to live on a reduced income.
When the holder dies, any remaining assets in the fund will be reallocated to other family members including the spouse (if still alive), although there will be inheritance tax charges to pay.
Another way to avoid annuities is to leave the country. Each year, many tens of thousands go to live in Australia, Canada, South Africa and New Zealand. Using a little known deal called QROPS (it stands for Qualifying Retirement Overseas Pensions) they can smuggle out their pension pot and keep it in their new country without having to worry about an annuity.
Can it help me avoid inheritance tax?
The short answer is yes.
But then so will other forms of money purchase pension provided they are “written in trust” and you die before drawing on the pension.
Written in trust is a legal way of getting the money from the pension provider to your family by-passing your will – and inheritance tax – on the way.
So if a person dies before withdrawing assets from their fund, members of their family could be able to inherit without payment of inheritance tax.
Again, this is a potentially significant saving, although exactly how much remains a grey area because it is unclear how the Revenue will treat such inheritances in the future.
It might come down to a judgement by the Revenue of the ‘intent’ of the Sipp fund holder – if the Revenue judges that investment in a Sipp was designed to avoid inheritance tax, then it could decide to impose a levy itself.
This would rule out “death bed” Sipps where the pension is taken out days before death. The Revenue is increasingly taking a tough line on dodgy deals that it claims are only undertaken to avoid or evade tax.
One of the big problems in trying to work around inheritance tax is what works today might not work when it comes to your demise and the need to pay the tax.
The best idea for anyone considering using a Sipp to avoid inheritance tax is to take professional advice at the time that will take account of that person’s individual circumstances.
But as the paragraph above states, nothing is guaranteed!
Read More on Sipps Pensions
What can you put into a SIPP pension?
Benefits and advantages of Sipps Pensions
Will I still have to buy an annuity?
Can it help me avoid inheritance tax?